What is the OCA literature?
What is Krugman's specialisation hypothesis?
What is the OCA period?
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Why is EMU not an optimum currency zone?
The eurozone crisis has revealed certain shortcomings of the EMU, such as its vulnerability to asymmetric shocks and its inability to act as predicted by the theory of optimum currency areas.
Is EMU becoming an optimum currency area the evidence on trade and business cycle synchronization?
Taken together, the estimates suggest that EMU has created a virtuous circle; by increasing trade and the synchronization of business cycles, EMU reduces the need for national monetary policy. That is, EMU seems along the path to becoming an optimum currency area.
What is OCA theory?
Optimum currency area theory (OCA) states that specific areas not bounded by national borders would benefit from a common currency. In other words, geographic regions may be better off using the same currency instead of each country within that geographic region using its own currency.
What does EMU mean in Europe?
The Economic and Monetary Union (EMU) represents a major step in the integration of EU economies. Launched in 1992, EMU involves the coordination of economic and fiscal policies, a common monetary policy, and a common currency, the euro.
Is the EU an OCA?
Economist Robert Mundell first outlined criteria for an OCA, which are based on the degree of integration and similarity between economies. The euro is an example of an application of an OCA, though events such as the Greek debt crisis have put this to the test.
What policy does the economic and Monetary Union EMU enforce?
Monetary policy involves influencing interest rates and exchange rates to benefit a country's economy. This is done by a central bank controlling the supply of money in the economy. For this reason, under EMU, monetary policy is closely coordinated, and within the euro area it is centralised and independent.
What are three methods of economic integration?
Economic integration can be classified into five additive levels, each present in the global landscape:Free trade. ... Custom union. ... Common market. ... Economic union (single market). ... Political union.
What is the difference between economic union and monetary union?
A currency union or monetary union is distinguished from a full-fledged economic and monetary union, in that they involve the sharing of a common currency but without further integration between participating countries.
What are the types of exchange rate system?
The basic type of exchange rate is called a floating exchange rate. In this, the movements in the currency are dictated by the market. Also, there is pegged currency, where the central bank keeps the rate from differentiating too much. There is a third one which is known as the fixed exchange rate.
What do Australians call emus?
According to reporting from NITV, the Warlpiri mob call emus “yankirri”, and the people of both the Gamilaraay and Wiradjuri nations referred to the bird as “thinawan” or “dinawan”.
What is the indigenous word for EMU?
Weitj, Wetj, or Waitj is the Noongar word for emu. The emu is a large, flightless native bird.
Is Sweden in EMU?
Sweden is not participating fully in the EU monetary union and has not adopted the euro.
Did the euro common currency increase or decrease business cycle synchronization for its member countries?
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.
How do the countries of the EMU benefit from using a single currency quizlet?
How do the countries of the EMU benefit from using a single currency? Using a single currency increases efficiency in production by offering the advantage of economies of scale. Using a single currency eliminates the transactions costs of currency conversion.
How do the countries of the EMU benefit from using a single currency?
EMU involves coordinating economic and fiscal policies, a common monetary policy, and a common currency, the euro. A single currency offers many advantages: it makes it easier for companies to conduct cross-border trade, the economy becomes more stable, and consumers have more choice and opportunities.
Which of the following best defines an optimum currency area?
The optimum currency area can be defined as the geographical area that would maximize economic benefits by keeping the exchange rate fixed within the area.
The Advantages And Disadvantages Of An Optimum Currency Area
An Optimum Currency Areas is characterized as a geographic region which would maximize its economic efficiency by adopting a single currency. The theory of Optimum Currency Areas attempts to determine such criteria that would indicate the necessary common features of a currency union countries in order to evaluate its attractiveness for potential new members.
The Pros And Disadvantages Of The European Monetary Union
Introduction From the intergovernmental conferences of Rome, Nice, Amsterdam and Lisbon, as well as the lastest accession of Croatia to the European Union (EU), it appears that the political imperative of the EU was, and still is, simultaneous deepening and enlarging of the EU.
European economic and monetary integration, and the optimum currency ...
European Economic and Monetary Integration, and the Optimum Currency Area Theory Francesco Paolo Mongelli (ECB)∗ Abstract: This essay follows the synergies and complementarities between European Economic and
Advantages And Disadvantages Of Joining A Currency Union ... - UKEssays
Transaction cost:- The most essential advantage connected with changing to a single currency was the removal of the need to change currency . Savings are very large because of the elimination of the transaction cost connected to the exchanging currency, the taxes for countries that have most of the exports to the European counties only.
Optimum Currency Area (OCA) Theory - UKEssays.com
One of the original founders of the OCA theory was economist Robert Mundell. In his first paper ‘A Theory of Optimum Currency Areas’ (1961) he presented several principal criteria to create a functioning monetary union.
What is the OCA literature?
The OCA literature has examined both one-off and permanent benefits and costs fromparticipating in a currency area. Most benefits and costs cannot be judged statically as theycan take different profiles over time -- i.e., in the early stages of a currency area vis-à-viswhen the new single currency can fully display its benefits both domestically andinternationally. Most benefits and costs can also take a different profile across participatingcountries -- e.g., between small and large countries, or for countries with a track record ofrelatively high inflation in the past. Admittedly the perspective of these costs and benefits is“euro-centric.” We can classify the main benefits as follows:
What is Krugman's specialisation hypothesis?
The “Krugman specialisation hypothesis” has a bearing on the costs from monetaryintegration. If countries become more specialised and vulnerable to asymmetric shocks, andtheir correlation of outputs declines, then each member country might feel a higher cost from
What is the OCA period?
A period in which “the subject [i.e., the OCA theory] was for years consigned tointellectual limbo” (Tavlas (1993)) followed the above contributions. The analyticalframework behind the OCA theory thus far started to weaken. Some authors noted that thispause is also explained by the loss of momentum toward monetary integration. When interestin European monetary integration re-emerged in the mid 1980s, both economists and policy-makers looked back at the OCA theory, but could not find clear answers to the questionwhether Europe should proceed toward complete monetary integration.
What Is an Optimal Currency Area (OCA)?
An optimal currency area (OCA) is the geographic area in which a single currency would create the greatest economic benefit. While traditionally each country has maintained its own separate national currency, work by Robert Mundell in the 1960s theorized that this might not be the most efficient economic arrangement. 1
What are the criteria for OCA?
According to Mundell, there are four main criteria for an OCA: 1 High labor mobility throughout the area. Easing labor mobility includes lowering administrative barriers such as visa-free travel, cultural barriers such as different languages, and institutional barriers such as restrictions on remittance of pensions or government benefits. 2 Capital mobility and price and wage flexibility. This ensures that capital and labor will flow between countries in the OCA according to the market forces of supply and demand to distribute the impact of economic shocks. 3 A currency risk-sharing or fiscal mechanism to share risk across countries in the OCA. This requires the transfer of money to regions experiencing economic difficulties from countries with surpluses, which may prove politically unpopular in higher-performing regions from which tax revenue will be transferred. The European sovereign debt crisis of 2009–2015 is considered evidence of the failure of the European Economic and Monetary Union (EMU) to satisfy these criteria as original EMU policy instituted a no-bailout clause, which soon became evident as unsustainable. 4 Similar business cycles. Cyclical ups and downs that are synchronous, or at least highly correlated, across countries in the OCA are necessary since the OCA’s central bank will by definition be implementing a uniform monetary policy across the OCA to offset economic recessions and contain inflation. Asynchronous cycles would unavoidably mean that a uniform monetary policy will end up being counter-cyclical for some countries and pro-cyclical in others.
What is the primary concern of the OCA model?
In this model, the primary concern is that asymmetric shocks may undermine the benefit of the OCA. If large asymmetric shocks are common and the criteria for an OCA are not met, then a system of separate currencies with floating exchange rates would be more suitable in order to deal with the negative effects of such shocks within the single country experiencing them.
Why is diversified production important in asymmetric economic shocks?
Countries that are heavily specialized in certain goods that other countries do not produce will be vulnerable to asymmetric economic shocks in those industries, and might not be suitable for membership in the OCA. Note that this criteria can come into conflict with some of the above criteria because the greater the degree of integration among countries' economies (mobility of goods, labor, and capital) the more they will tend to specialize in different industries.
Why are cyclical ups and downs necessary?
Cyclical ups and downs that are synchronous, or at least highly correlated, across countries in the OCA are necessary since the OCA’s central bank will by definition be implementing a uniform monetary policy across the OCA to offset economic recessions and contain inflation.
What is an OCA?
An optimal currency area (OCA) is the geopolitical area over which a single, unified currency will provide the best balance of economies of scale to a currency and effectiveness of macroeconomic policy to promote growth and stability. Economist Robert Mundell first outlined criteria for an OCA, which are based on the degree ...
Why are homogeneous policy preferences important?
Homogeneous policy preferences across countries in the OCA are important because monetary policy, and to some extent fiscal policy in the form of transfers, will be a collective decision and responsibility of the countries in the OCA. Major differences in local preferences for how to respond to either symmetric or asymmetric shocks can undermine cooperation and political will to join or remain in the OCA.
What is the OCA literature?
The OCA literature has examined both one-off and permanent benefits and costs fromparticipating in a currency area. Most benefits and costs cannot be judged statically as theycan take different profiles over time -- i.e., in the early stages of a currency area vis-à-viswhen the new single currency can fully display its benefits both domestically andinternationally. Most benefits and costs can also take a different profile across participatingcountries -- e.g., between small and large countries, or for countries with a track record ofrelatively high inflation in the past. Admittedly the perspective of these costs and benefits is“euro-centric.” We can classify the main benefits as follows:
What is Krugman's specialisation hypothesis?
The “Krugman specialisation hypothesis” has a bearing on the costs from monetaryintegration. If countries become more specialised and vulnerable to asymmetric shocks, andtheir correlation of outputs declines, then each member country might feel a higher cost from
What is the OCA period?
A period in which “the subject [i.e., the OCA theory] was for years consigned tointellectual limbo” (Tavlas (1993)) followed the above contributions. The analyticalframework behind the OCA theory thus far started to weaken. Some authors noted that thispause is also explained by the loss of momentum toward monetary integration. When interestin European monetary integration re-emerged in the mid 1980s, both economists and policy-makers looked back at the OCA theory, but could not find clear answers to the questionwhether Europe should proceed toward complete monetary integration.
