OCA cubed: Mundell in 3D

Michaela Krčílková and Jan Zapal
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Michaela Krčílková: Czech University of Life Sciences Prague,Faculty of Economics and Management, http://www.pef.czu.cz/en/?r=987

No 2009/24, Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies

Abstract: This paper intends to fill two gaps in the Optimal Currency Area literature. First of all, Mundell's original idea has very little formalmodel theoretical underpinning. Second, it almost exclusively views countries contemplating monetary unification as single economies. We question this view and expand the model to incorporate the division of an economy into three sectors. In the empirical part of the paper, we follow recent OCA empirici literature and investigate the correlation of shocks between the individual new EU member countries and the `EU-core'. Treating the whole economy as one sector this is a standard exercise. However, since the three-sector version of our model provides a natural metric on which to assess the appropriateness of unification, we are able to repeat the exercise treating each country's economy as a collection of three distinct sectors.

Keywords: OCA; supply and demand shocks; VAR decomposition; new EU member states (search for similar items in EconPapers)
JEL-codes: E32 F15 F40 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2009-10, Revised 2009-10
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-tra
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