Testing Mundell's Intuition of Endogenous OCA Theory

Thierry Warin, Phanindra Wunnava and Hubert Janicki

No 3739, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper presents an empirical assessment of the endogenous optimum currency area theory. Frankel and Rose (1998) study the endogeneity of a currency union through the lens of international trade flows. Our study extends Frankel and Rose's model by using FDI flows to test the original theory developed by Mundell in 1973. A gravity model is used to empirically assess the effectiveness of the convergence criteria by examining location specific advantages that guide multinational investment within the European Union. A fixed effects model based on a panel data of foreign direct investment (FDI) flows within the EU-15 shows that horizontal investment promotes the diffusion of the production process across the national border. Specifically, our results suggest that economic convergence ensured by belonging to the common currency area helps double FDI flows.

Keywords: endogenous optimum currency area; gravity model; economic integration (search for similar items in EconPapers)
JEL-codes: C23 C52 F15 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2008-09
New Economics Papers: this item is included in nep-eec and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Published - published in: Review of International Economics, 2009, 17 (1), 74-89

Downloads: (external link)
https://docs.iza.org/dp3739.pdf (application/pdf)

Related works:
Journal Article: Testing Mundell's Intuition of Endogenous OCA Theory* (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:iza:izadps:dp3739

Ordering information: This working paper can be ordered from
IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany

Access Statistics for this paper

More papers in IZA Discussion Papers from Institute of Labor Economics (IZA) IZA, P.O. Box 7240, D-53072 Bonn, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Holger Hinte ().