Optimum Currency Areas, Real and Nominal Convergence in the European Union

João Andrade and António Portugal Duarte

No 2015-03, GEMF Working Papers from GEMF, Faculty of Economics, University of Coimbra

Abstract: It is well known and widely accepted by economists that the characteristics of the European countries that become the Eurozone in 1999 did not match the requirements of an Optimum Currency Area (OCA). The only criteria for membership of the new area were nominal. A strict level of convergence in inflation and interest rates was imposed. In addition to the nominal convergence (monetary), a process of convergence of nominal incomes in the new monetary unit was expected to be generated with the monetary integration. After summarizing the criteria for a successful currency area in the context of the OCA theory, we study the real and nominal convergence process for an older group (11) of countries to establish whether or not these countries form an OCA. We apply the original conditions imposed on ADF tests, together with the Schmidt-Phillips tests, and we estimate fractional differential process to overcome the disadvantages of the traditional tests. We conclude that a process of real divergence and nominal convergence does exist. We think this is a source of genuine imbalance in the European integration process that can destroy the harmonious development of a European Monetary Union.

Keywords: Monetary integration; Optimum Currency Areas; real and nominal convergence; spectral analysis and total factor productivity. (search for similar items in EconPapers)
JEL-codes: C01 E24 F31 J31 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2015-01
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Journal Article: Optimum Currency Areas, Real and Nominal Convergence in the European Union (2015)
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