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Concept
Optimum currency area
Summary
In economics, an optimum currency area (OCA) or optimal currency region (OCR) is a geographical region in which it would maximize economic efficiency to have the entire region share a single currency.
The underlying theory describes the optimal characteristics for the merger of currencies or the creation of a new currency. The theory is used often to argue whether or not a certain region is ready to become a currency union, one of the final stages in economic integration.
An optimal currency area is often larger than a country. For instance, part of the rationale behind the creation of the euro is that the individual countries of Europe do not each form an optimal currency area, but that Europe as a whole does. The creation of the euro is often cited because it provides the most modern and largest-scale case study of an attempt to identify an optimum currency area, and provides a comparative before-and-after model by which to test the principles of the theory.
In theory, an optimal currency area could also be smaller than a country. Some economists have argued that the United States, for example, has some regions that do not fit into an optimal currency area with the rest of the country.
The theory of the optimal currency area was pioneered in the 1960s by economist Robert Mundell. Credit often goes to Mundell as the originator of the idea, but others point to earlier work done in the area by Abba Lerner. Kenen (1969) and McKinnon (1963) were further developers of this idea.
Published by Mundell in 1961, this is the most cited by economists. Here asymmetric shocks are considered to undermine the real economy, so if they are too important and cannot be controlled, a regime with floating exchange rates is considered better, because the global monetary policy (interest rates) will not be fine tuned for the particular situation of each constituent region.
The four often cited criteria for a successful currency union are:
Labor mobility across the region.
Official source
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