The Endogeneity of the Optimum Currency Area Criteria

Jeffrey Alexander Frankel () and Andrew Rose ()

No 5700, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A country's suitability for entry into a currency union depends on a number of economic conditions. These include, inter alia, the intensity of trade with other potential members of the currency union, and the extent to which domestic business cycles are correlated with those of the other countries. But international trade patterns and international business cycle correlations are endogenous. This paper develops and investigates the relationship between the two phenomena. Using thirty years of data for twenty industrialized countries, we uncover a strong and striking empirical finding: countries with closer trade links tend to have more tightly correlated business cycles. It follows that countries are more likely to satisfy the criteria for entry into a currency union after taking steps toward economic integration than before.

JEL-codes: F14 F41 (search for similar items in EconPapers)
Date: 1996-08
Note: ITI IFM
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Published as The Economic Journal, Vol. 108, no. 449 (July 1998): 1009-1025. Reprinted in Swedish Economy Policy Review 4 (1997): 487-512.

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Related works:
Working Paper: The Endogeneity of the Optimum Currency Area Criteria (1996)
Journal Article: The Endogeneity of the Optimum Currency Area Criteria (1998)
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