On Optimal Currency Areas: Common Shocks Versus Common Persistence of Shocks

Louisa Grimm, Sven Steinkamp and Frank Westermann

International Journal of Finance & Economics, 2025, vol. 30, issue 4, 3825-3837

Abstract: The Optimal Currency Area (OCA) literature has been focusing on the co‐movement of business cycle shocks as a key policy criterion. We document in a simple Barro–Gordon framework that, in addition to a high correlation of shocks, a common persistence of shocks is a relevant OCA criterion. The model provides a conceptual underpinning for empirical studies that have used the Serial Correlation Common Features (SCCF) test to evaluate common currency areas. We apply the SCCF test to a set of countries that could potentially introduce the Euro and find for the period from 1999 (Q1) to 2019 (Q3) only little evidence that the acceding countries share a common cyclical response pattern with the European Monetary Union (EMU) aggregate.

Date: 2025
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