Optimum Currency Area Criteria Research Articles

Monetary union in Southeast Asia: An assessment of the optimum currency area theory*

AbstractThis paper applies optimum currency area (OCA) theory to Southeast Asia to assess the potential for a monetary union in that region. We construct a panel of 10 Southeast Asian countries over the period 1990–2018 and apply the dynamic OLS estimator to quantify the costs and benefits of a potential OCA. A possible monetary union in Southeast Asia is vulnerable to asymmetric shocks, although the degree of specialisation has decreased and the openness index increased. Estimates confirm that both OCA criteria favour an increase in the region's income and FDI inflows and a reduction of its unemployment rate. However, inadequate labour mobility and stagnating intra‐trade shares are major obstacles in this regard, but if addressed they could benefit economic development and GDP per capita in the ASEAN region. We conclude that Southeast Asia is far from being an optimum currency area, but if it were to form a common currency area, the loss of economic sovereignty and its costs would be more than offset by the resulting monetary efficiency gain.

Optimum currency areas: State of research, the European Monetary Union

The present paper deals with optimum currency areas (OCA). Its main goal is to give a synthesis of the central research areas in this field and provide a link to the real-life example of the European Monetary Union (EMU). Overall, the paper will possibly uncover potential areas for further research, and thus may be able to serve other researchers. The article illustrates the original OCA theory by Robert Mundell and further important research built upon it. The OCA criteria resulting from the foregoing research are then placed aside the actual Maastricht criteria set up by the European Union, necessary to fulfil for joining the eurozone. The question of whether these criteria are even necessary is examined alongside the topic of endogeneity, which is a relatively new field of research in the OCA field. Lastly, the pros and cons of joining a single currency area are analyzed, before the author provides suggestions for potential future research.

Monetary integration in West Africa: Are business cycles converging?

AbstractThe aim of this paper was to test the hypothesis of business cycle convergence in member countries of the Economic Community of West African States (ECOWAS) engaged in a monetary union process. We applied the concepts of beta‐convergence and sigma‐convergence to business cycles in the region in the period 1990–2018. Two analytical approaches suggested that during this period, the hypothesis of the convergence of business cycles cannot be rejected. The study highlighted the positive effect of trade intensity on the convergence of member countries’ business cycles, in line with the theory of the endogeneity of optimum currency area criteria. These results imply that the initial asymmetric nature of the business cycles of ECOWAS countries does not represent an economic obstacle to the creation of a monetary union in the zone. This cyclical convergence is likely to accelerate with the intensification of trade resulting from the newly created union owing to deeper financial integration and the elimination of transaction costs and uncertainty associated with exchange rate volatility.

Interpreting the European monetary union with OCA criteria

This aim of this study is to reinterpret optimum currency area (OCA) theory to assess the capacity of a monetary union to produce economic growth. Instead of utilizing OCA criteria to evaluate the costs and benefits of a monetary union, we use Kathleen R. McNamara’s framework to assemble them and analyze their interaction and effect on economic growth. First, we show that OCA theory is unable to address the question. Then, we develop a new framework and conclude that a monetary union brings structural deflation, economic divergence, and current account imbalances. Finally, we test these conclusions on the European monetary union. Post-Keynesian works are mobilized to show their concomitance with our framework in the second and third sections of this paper.

Neoptimalnost Evrozone - analiza bazirana na OCA teoriji

This paper deals with the reconsideration of crucial Optimum Currency Area (OCA) criteria observing Eurozone (EZ) members in the period 2007-2018. According the aim to highlight key obstacles to EZ optimality, economies are mainly grouped into the core and peripheral countries of the initial 12 EZ members (EZ12), and subsequently joined 7 Emerging European Economies (EZ19). The research is based on descriptive analysis of openness and production diversification, macroeconomic divergences and heterogeneity of EZ members, labor mobility and wage flexibility, as well as political OCA criteria. While EZ was not initially constituted as an OCA, this research has confirmed persistent difficulties in EZ functioning in the (post) crisis period. Macroeconomic divergences between member states, insufficient labor mobility and wage flexibility, as well as the absence of political will towards creation of more efficient fiscal union, are identified as the main challenges of EZ sustainability.

Literature Review: Critique of European Monetary Union

The paper summarizes the literature of the explanations of the European debt crisis. We mainly use literature which was published after the financial crisis 2007/08. Many papers were written about the topic, but there is no clear overview about the different EMU critique. This paper tries to fill this gap. The discussions about advantages and disadvantages started at the end of the 1980s, but they intensified during and after the debt crisis. We classified the literature into non-European and European Economic Monetary Union (EMU) critique. Within the non-European literature especially US economists are relevant who referred to the issue of Optimal Currency Area (OCA). Europe did not fulfil the OCA criteria in their view. The European critique can be divided into ordoliberal, Post-Keynesian and heterodox thoughts. Most relevant for politics is still the ordo liberal EMU critique.

THE SINGLE CURRENCY FOR ISLAMIC NATIONS: DO HETEROGENEITIES MATTER?

The purpose of this study is to assess the readiness of 44 OIC member countries to form a currency union and to test whether the Optimum Currency Area (OCA) criteria remain relevant to a large region like the OIC. Large geographic size is subject to socio-economic and geographic disparities. This study employs the OCA-index to estimate the degree of readiness of the OIC to form a currency union. Five selected criteria –business cycle synchronization, trade openness, inflation similarity, the size of the economy, and distance – were employed to determine the OCA using Ordinary Least Squares regression. The findings of this study estimate that 63 percent of pairs of countries in the OIC are ready to form a currency union. The selected OCA’s criteria present the best-fit variable in explaining the OCA for the OIC. This paper verifies that economic and geographic heterogeneities are not the main obstacle to forming a currency union. This study provides an important contribution to the theory of OCA primarily in clarifying the application of the OCA conditions in a large observation like the OIC, which comprises many countries and many blocs.

China’s Dollar-linked Hong Kong during the Global Crisis

This paper explores the domestic price level and trade competitiveness of Hong Kong in addition to the compatibility of this dollar-based currency board to the criteria inspired by the optimum currency area (OCA) theory. On price and competitiveness, findings point out that during the turmoil Hong Kong had not performed as well as that in the past and an apparent reason for this is the inflows of hot capital from abroad especially of the US that fuelled rising property prices. On conformity to the OCA criteria, the findings broadly corroborate the fixed exchange regime with the US as the monetary anchor country but at the same time China appears as a prospective contender to US as the monetary anchor. In the longer run, amidst the prolonged economic and monetary weaknesses in the US plus the emergence of renminbi as a global currency, Hong Kong might as well unify its exchange rate with the Chinese money.

Monetary union in Latin America: an assessment in the context of optimum currency area

ABSTRACT The article applies the optimum currency area (OCA) theory to Latin America to assess the potential of a monetary union in Latin America and in its major existing regional trade agreements (RTAs). According to OCA criteria we find that Latin America is far from being an optimum currency area, as its countries’ exposure to asymmetric shocks is high and their capacities to adjust in response to macroeconomic disturbances are limited. Using a panel of 20 Latin American countries from 1990 to 2014, we apply the dynamic OLS estimation techniques to estimate the costs and benefits of a potential monetary union in Latin America and in its various RTAs. to estimate the costs and benefits of a potential monetary union in Latin America and in its various RTAs. We find that the costs are high, because Latin America’s economies are vulnerable to severe macroeconomic disturbances and its RTAs differ significantly in their response to negative demand shocks. Most of the monetary efficiency gains are shown to be the result of a common restrictive monetary policy which would result in higher FDI inflows and, to a more limited extent, increased GDP, both overall and per capita. Although Central American countries are shown to be most suitable for further monetary integration, we conclude that Latin American countries should head first towards greater economic and political integration.

Price Adjustment in Currency Unions: Another Dimension to the Endogeneity of the Optimum Currency Area Criteria?

AbstractIn a rational expectations model, wages and prices should respond more to shocks in currency unions than under adjustable pegs because of the absence of exchange rate adjustment. This is an aspect of the endogeneity of the optimum currency area criteria that has been largely ignored. Empirical evidence from three currency unions tends to suggest some degree of endogeneity of price flexibility, but the rate of adjustment is slow. Self‐selection into currency unions by countries with naturally greater price flexibility does not appear to be a significant factor.

The impact of intra-industry trade on business cycle synchronization in East Asia

This paper empirically analyzes distinctions between intra- and inter-industry trade indices. The research indicates that the co-movements of business cycles are influenced more through the intra-industry trade channel than by the total volume of trade itself. As trade integration among Asian countries increased, business cycle synchronization among these countries was expected to expand through trade transmission. Inter-industry trade resulting in higher specialization will induce less synchronized business cycles, while intra-industry trade could lead to increased business cycle synchronization. Moreover, I find that increased business cycle synchronization, as one of the optimum currency area criteria, is overemphasized.

Did the Euro Common Currency Increase or Decrease Business Cycle Synchronization for its Member Countries?

We use two variants of Markov switching models to assess changes in output synchronization since the creation of the euro. Out of eight eurozone countries investigated, only one—the Netherlands—has synchronization increased since euro adoption, supporting the ‘endogenous optimal currency area’ argument of Frankel and Rose. However, in three other cases, business cycle synchronization actually fell since the euro's creation. Thus the ‘endogeneity’ of the optimal currency area criteria can go both ways—adopting a common currency may increase synchronization for nations ready for a common currency, but it can lower synchronization for nations that are far from synchronized before monetary unification.

Перспективы создания валютной зоны в АСЕАН

The article assesses the prospects of creating an optimum currency area (OCA) among ASEAN countries. To ensure sustainability of the creating currency zone, the potential candidate countries should meet the criteria of the OCA theory. At the same time, the present technique of assessing candidate countries implies that they must meet the OCA criteria relative to the «anchor» country. This approach creates the problem of the sensitivity of calculation results to the choice of the anchor country. Thus, the case of the OCA composition with Indonesia as the anchor country is different from the one with Singapore as the anchor country. Author’s modification of the specified technique allows bypassing the mentioned problem. Applying the modified approach to the ASEAN member countries allows concluding that the creation of an optimum currency area in South-East Asia is economically feasible for Singapore, Vietnam, Indonesia, Malaysia, Philippines, Brunei Darussalam and Thailand. The rest of the ASEAN member countries (Cambodia, Lao PDR and Myanmar) have not yet reached a high degree of macroeconomic convergence with partners of the integration bloc and even among themselves. Therefore there is a need for a transition period, during which the economies of these three countries can «catch up» the level of the more developed ASEAN member countries.

Theoretical and Empirical Discussions on Endogeneities of OCA Criteria A Literature Review

The optimum currency areas (OCA) theory deals with the criteria as well as the costs and benefits of for countries to enter/form a common currency area. The traditional OCA theory explores the economic variables determining the boarders for OCA, and whether a single country fulfills the requirements to join an OCA by employing the static costs and benefits analysis. The endogenous OCA theory introduces the long-run dynamic equilibrium analysis into the cost-benefit balance model and suggests that economic and monetary integration are self reinforcing processes, i.e., the endogenous nature of OCA criteria may make a country be more likely to satisfy the criteria for the entry into a currency union ex post though it fails ex ante, which in turn reduces the costs of a currency union by increasing the symmetry of disturbances. Although the creation of the euro is often cited as the most modern and largest-scale case study of OCA, the evolvement of economic integration in other regions, especially East Asia, has increased interest in the viability of a common currency for economies in these regions. The previous studies in Euro Union could provide us new perspective and useful instruments of analysis with respect to the study on other regions. This paper surveys the evolution of the theoretical and empirical studies on endogeneities of OCA criteria in order to draw inferences for the prospects and challenges of greater monetary cooperation in other regions.

Volatility of industrial production growth and characteristics of optimal currency areas in EU-12 countries

This paper investigates how the introduction of the euro in the EU-12 countries influenced the short-term volatility of output, measured by the volatility of industrial production growth. It assesses whether more favorable criteria of optimum currency areas keep the volatility of industrial production growth constant. Finally, it investigates the impact of the global financial crisis on the volatility of industrial production growth and on the characteristics of the optimum currency areas of the EU-12 countries. This paper uses the Chow breakpoint test and the Quandt-Andrews test to check for structural breaks in the volatility obtained from ARMA (p,q) and AR(p)-EGARCH(1,1) models. The results suggest that after the introduction of the euro, the volatility of industrial production growth has not significantly changed in Austria, France, Luxembourg, the Netherlands and Spain. However, the volatility of industrial production growth did increase in Finland, Ireland, Italy, Luxembourg and Portugal after the adoption of the common currency. In Germany and Greece the volatility of industrial production increased after 2002 and 1997 respectively. This observation cannot be connected directly to the introduction of the euro. After the beginning of the financial crisis, the volatility of industrial production growth increased in all EU-12 countries except France and Greece. Criteria for optimum currency areas fail to explain why the volatility of some EU-12 countries remained unchanged after the introduction of the euro and after the start of the financial crisis. Those countries, where the volatility of industrial production has not changed significantly after the introduction of the euro, had a long history of fixed or pegged exchange rate regimes. This group of countries recovered faster after the financial crisis.

Financial Integration, Exchange Rate Regimes in CEECs, and Joining the EMU: Just Do It. . .

Candidate countries of central and eastern Europe (CEECs) are suppose to join the EU in 2004, June, which imply that they will face important challenges in the conduct of macroeconomic policy, in order to be able to enter the ERM-II system and eventually enter the EMU (European Monetary Union). Abandoning an independent monetary policy might entail significant costs for countries, which have succeeded in recovering and are in a process of catching-up. However those costs have probably been exaggerated, and their estimation biased by the traditional optimal currency area criteria. The main criticism against a too strong emphasis on the latter rests on two arguments. The first one is that assessing the trade-off for joining the EMU does not deliver the same conclusion ex ante and ex post. Meanwhile, the degree of financial integration will likely increase dramatically, which in turns will decrease the opportunity cost of loosing the monetary policy for absorbing country specific shocks. In a world of capital mobility, the room left for an independent monetary policy is very narrow, maybe close to zero in small, emerging countries, more vulnerable to speculative attacks than countries in the core. The second argument is more empirical. While the link between the exchange rate regime and the fundamentals is rather weak, the political agenda of joining the EU and subsequently the EMU seems to explain the choice of the exchange rate regime.

RELATIVE PURCHASING POWER PARITY AND THE EUROPEAN MONETARY UNION: EVIDENCE FROM EASTERN EUROPE

ABSTRACT. This paper examine whether relative purchasing power parity holds for Albania, Bulgaria, Croatia, FYR Macedonia, Romania and Turkey versus Germany over the period January 1999 to May 2013. We investigate the real exchange rate by using a Dickey-Fuller test. Thereafter, we investigate the real exchange rate by allowing for a trend with the origin in the Balassa-Samuelson effect. We also investigate the same pairs using the Engle-Granger cointegration test. However, for the Engle-Granger cointegration test, four of the pairs are excluded as the nominal exchange rate and the price differential are not integrated by the same order. We have investigated the half-life of each pair in each of the three approaches. We find ambiguous results both regarding relative PPP and the speed of adjustment towards the PPP equilibrium. We use the results to investigate whether the Albanian, Bulgarian, Croatian, FYR Macedonian, Romanian and Turkish economies are synchronized with the German economy and if they are ready to enter the European Monetary Union.JEL Classification: E5, E31 F33Keywords: Consumer Price Index, Monetary Policy, Monetary System, Currency Union, EMU, Exchange Rates, Economic Indicators(ProQuest: ... denotes formulae omitted.)IntroductionThere is today a wide discussion in Europe concerning which countries to include in the European Monetary Union (EMU) and how these countries (and the EMU itself) will benefit from a membership. Schadler, Drummon, Kuijs, Murgasova and Elkan (2005) argue that, for countries adopting the Euro, the trade-off is between gain in trade and growth and increased volatility as a result of losing the exchange rate as a shock absorber. Further they conclude that for central European countries (CEC), an adoption of the Euro will hasten real convergence and will at most suffer a modest increase in volatility. The basic question comes down to: when and how to adopt the Euro (Schadler, Drummond, Kuijs, Murgasova, & Elkan, 2005).One deterministic factor for the loss of increased volatility is the optimum currency area (OCA) criteria. The OCA captures the sensitiveness of a country's economy to real shocks that are asymmetric to those in the currency union. The OCA therefore measures how often the Euro-area monetary policy is likely to be different from the monetary policy necessary for the potential incoming country. In other words, the OCA measures whether the economic cycles in the Euro-area and the economic cycles in the potential EMU-client are synchronized. The OCA criteria also focus on how well the potential client can adopt to shocks without their own monetary policy (Schadler, Drummond, Kuijs, Murgasova, & Elkan, 2005).This paper discusses relative purchasing power parity (PPP) in some of the countries in the Balkan area versus Germany, which is the largest economy in the EMU. Findings that suggest that PPP holds do not automatically suggest that OCA criteria are fulfilled and that the economies are synchronized. However, positive finding in regards of PPP implies that the real exchange rates share common trends and are driven by economic fundamentals. Thus, positive findings of PPP suggest that the analyzed country is suitable to adopt the euro regarding the terms discussed above (Caporale, Ciferri, & Girardi, 2008). The countries examined in this paper are Albania, Bulgaria, Croatia, FYR Macedonia, Romania and Turkey.Purchasing Power ParityPPP is the simple idea that arbitrage enforces national price levels to be equal after converted to the same currency (Rogoff, 1996). Rogoff (1996) writes that most economists believe that PPP is a long term anchor for real exchange rates; however, few take PPP seriously as a short term proposition. There are several variants of PPP.The Law of one PriceThe strictest version of PPP is the law of one price (LOP). The LOP states that after converting prices to one common currency, any good should have the same price across countries. …

MACROECONOMIC SHOCKS ASYMMETRY: SEE AS AN OPTIMAL CURRENCY AREA

This paper has the goal to evaluate the existence of asymmetry of macroeconomic shocks between the SEE countries. It focuses on the Optimum Currency Area (OCA) theory to determine the readiness of any country to participate in a monetary union. The main goal of the study is to evaluate the OCA criteria for Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Greece, Macedonia, Montenegro, Kosovo, Serbia and Slovenia. The focus will be on the trade and financial links among these countries, the harmonization of business cycles and the similarities in the inflation movements. Going through often cited criteria for a successful currency union the paper will try to give conclusion for the possibilities to use the benefits of the OCA in the region.The paper will contribute with its assumptions that will be used in assessing the feasibility of a common currency area (CCA). That assumption will focus on the existence of the asymmetric shocks that will increase the costs of forming a CCA in SEE countries. In this paper, the comparative analysis of the key variables, policies and recommendations, gives profound basis for making conclusions related to the different macroeconomic policies behavior in terms of bad economic performance. Identification of the imbalances, national or international should give an answer for the dilemmas about the consistency of certain measure in terms of OCA.

The Eurozone: Piecemeal Approach to an Optimum Currency Area

Soon after the establishment of the Eurozone it became obvious that the structural differences between member states would not abate, as expected, but rather gradually widen. Although part of the problem can be attributed to the enlargement process, it also relates to asymmetric effects of the common currency and to diverging economic policies. This paper discusses the literature which associates the economic characteristics of EMU with arguments of the optimum currency area (OCA) theory and asks for missing capstones that would meliorate EMU to eventually resemble an OCA. As potential candidates for such building blocks, some sort of fiscal union and lender of last resort may qualify, drawing on the experiences of other currency unions and federal states. The financial and debt crisis has revealed that the endogenous forces within a currency union may be too slow to absorb the shocks originating from the crisis. For a currency union to survive in such a situation it is all the more important that the OCA criteria are met and/or that complementary institutions are in place. However, as actual developments in the Eurozone reveal, the political process of approaching an OCA is piecemeal rather than comprehensive and prompt.

The endogeneity of optimum currency area criteria in the context of financial crisis: Evidence from the time-frequency domain analysis

We provide the wavelet analysis of the economic cycle synchronization during the recent financial crisis. However, the global financial crisis caused economic cycles in most European countries to become more strongly synchronized without increasing of the real convergence process. Our contribution is an application of the singular value decomposition to identify and remove the long-term trend including outliers appearing in the year 2007–2010. We found that the historically greater integration provides more highly synchronized cycles in the core Euro area member countries.