An Optimum-Currency-Area Odyssey

Harris Dellas () and George Tavlas

No 102, Working Papers from Bank of Greece

Abstract: The theory of optimum-currency-areas was conceived and developed in three highly influential papers, written by Mundell (1961), McKinnon (1963) and Kenen (1969). Those authors identified characteristics that potential members of a monetary union should ideally possess in order to make it feasible to surrender a nationally- tailored monetary policy and the adjustment of an exchange rate of a national currency. We trace the development of optimum currency- area theory, which, after a flurry of research into the subject in the 1960s, was relegated to intellectual purgatory for about 20 years. We then discuss factors that led to a renewed interest into the subject, beginning in the early 1990s. Milton Friedman plays a pivotal role in our narrative; Friedman’s work on monetary integration in the early 1950s presaged subsequent optimum-currency-area contributions; Mundell’s classic formulation of an optimal currency area was aimed, in part, at refuting Friedman’s ‘‘strong’’ case for floating exchange rates; and Friedman’s work on the role of monetary policy had the effect of helping to revive interest in optimum-currency-area analysis. The paper concludes with a discussion of recent analytical work, using New Keynesian models, which has the promise of fulfilling the unfinished agenda set-out by the original contributors to the optimum-currency-area literature, that is, providing a consistent framework in which a country’s characteristics can be used to determine its optimal exchange-rate regime

Keywords: Optimum-currency-areas; Exchange-rate regimes; New Keynesian models (search for similar items in EconPapers)
JEL-codes: F33 F41 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2009-09
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac and nep-mon
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Citations: View citations in EconPapers (78)

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Related works:
Working Paper: An Optimum Currency Area Odyssey (2010)
Journal Article: An optimum-currency-area odyssey (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:bog:wpaper:102

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