Optimum currency area. Is a fixed exchange rate regime more suitable than a flexible one?

Term Paper , 2011 , 22 Pages

Economics - Macro-economics, general

This term paper outlines the theory of Optimum Currency Area (OCA), also known as an Optimal Currency Region (OCR). It also deals with the question under which conditions it is more suitable to have a fixed exchange rate regime or a flexible exchange rates regime in an OCA.

The theory of OCA was developed in the early 1960s and deals with mixed, complicated issues of international macroeconomics and "emerged from the debate on the advantages and disadvantages of fixed versus flexible exchange rate regimes". Moreover the theory "attempts to answer the question under which circumstances it is beneficiary for a country or region to constitute a common currency area with other countries or region". This question was analyzed and contributed by the pioneered work of Mundell (1961). Other contributors at the beginning of this theory were McKinnon (1962) and Kenen (1969). Their cognition were based on founding’s by Friedman (1953) and Meade (1957).

Table of Contents

1. Introduction

2. History and Development of the Theory of Optimum Currency Area
2.1 The “pioneering Phase”: from the early 1960s to the early 1970s
2.1.1 Price and wage flexibility
2.1.2 Mobility of factors of production including labor
2.1.3 Financial market integration
2.1.4 The degree of economic openness
2.1.5 The diversification in production and consumption
2.1.6 Similarities of inflation rates
2.1.7 Fiscal integration
2.1.8 Political integration
2.2 The “Reconciliation Phase” – the 1970s

3. The “Reassessment Phase:” – the 1980s and Early 1990s
3.1. The first try to establish a European currency
3.1.1 The end of World War II
3.1.2 Creation of the European Monetary System (EMS)
3.1.3 Preparation for the European Economic and Monetary Union (EMU)
3.2 The “Empirical Phase:” – from the 1980s to today

4 Fixed exchange rate and flexible exchange rate in an OCA
4.1 To Fix or to Float: the influence of Friedman in the 1950s
4.2 Mundell’s models
4.2.1 OCA with stationary expectations
4.2.2 OCA with international risk sharing
4.3 Extensions of the OCA theory

5 Fixed versus flexible exchange rates
5.1 The case for flexible exchange rates
5.1.1 Monetary Policy Autonomy
5.1.2 Trade Balance Adjustments
5.2 The case for fixed exchange rates
5.2.1 Monetary Discipline
5.2.2 Speculation
5.2.3 Uncertainty
5.2.4 Trade Balance Adjustments

6 Conclusion

7 Literature

8 Internet Sources

9 Appendix

• Author: Sofia Roth (Author)
• Publication Year: 2011
• Pages: 22
• Catalog Number: V201741
• ISBN (eBook): 9783668717053
• ISBN (Book): 9783668717060
• Language: English
• Tags: Monetary Union, Europe, Europa, Währungsunion, fixed exchange rate, flexible exchange rate, exchange rate regime, optimum currency area