The Endogeneity of the Optimum Currency Area Criteria

Jeffrey Frankel and Andrew Rose

No 1473, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: A country’s suitability for entry into a currency union depends on a number of economic conditions. These include, inter alia, the intensity or 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 phenomenon. Using 30 years of data for 20 industrialized countries, we uncover a strong and striking empirical finding: countries with close 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 towards economic integration than before.

Keywords: Business Cycle; Empirical; Instrumental Variables; Integration; International; Trade (search for similar items in EconPapers)
JEL-codes: F15 F41 (search for similar items in EconPapers)
Date: 1996-09
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Citations: View citations in EconPapers (126)

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