Optimum Currency Area Criteria Research Articles

Should the UK Join Emu?

This article considers the economic case for UK membership of EMU. Traditional optimum currency area (OCA) analysis provides only a weak case for membership: the UK is located among the periphery and not in the core. Considerations of the possible costs of isolation (the risks of trade discrimination and the dangers of a volatile currency) together with some pertinent qualifications of OCA analysis (the possible endogeneity of the OCA criteria) serve to strengthen the case for joining. Whilst it is not overwhelming, the final verdict is positive.

Stability of Monetary Unions: Lessons from the Break-up of Czechoslovakia

In 1993, Czechoslovakia experienced a two-fold break-up: On January 1, the country disintegrated as a political union, while preserving an economic and monetary union. Then, the Czech-Slovak monetary union collapsed on February 8. We analyze the economic background of the two break-ups, and discuss lessons for stability of monetary unions in general. We argue that Czechoslovakia fulfilled some of the optimum currency area criteria; however, given the low correlation of permanent shocks, it appears it was relatively less integrated than some other existing unions. That, along with low labor mobility and higher concentration of heavy and military industries in Slovakia, made Czechoslovak economy vulnerable to asymmetric economic shocks-such as those induced by the economic transition. Furthermore, the Czech-Slovak monetary union was marred by low credibility, lack of political commitment, low exit costs, and the absence of fiscal transfers.

A Comment on Empirical Estimation of Patterns of Shocks Utilizing the VAR Methodology on Developing Countries

What is a country`s optimal choice of an exchange rate regime? One avenue which has gained prominence is the Optimum Currency Area criteria of pattems of shocks which suggests that a flexible exchange rate may be less costly for regions who face asymmetric shocks, since they are forced to have conflicting policy responses, and vice versa.1 While there are a number of methodologies to calculate the pattems of shocks, the VAR methodology, which results from a technique introduced in Bayoumi and Eichengreen a[1992, 1994]; B&E from now onn, may be at present one of the most popular. In the estimation of their model the authors have introduced some “over-identifying conditions”2 (called OIC from now on) which confirm the validity of their decomposition.