Mundell, the Euro, and Optimum Currency Areas

Ronald McKinnon

Working Papers from Stanford University, Department of Economics

Abstract: May 2000

Robert Mundell seems to be on both sides of the debate over European monetary unification and on the adoption of common monetary standards in other parts of the world. But this paradox can be resolved by noting that there are two Mundell models-earlier and later. From his theory of optimum currency areas published in 1961, Mundell seemed to be arguing in favor of making currency areas fairly small, as defined by the domain of labor mobility, so as to better offset asymmetric shocks, i.e., those affecting one area differently from another. However, in two important papers written in 1970, but not published until 1973 in an obscure conference volume, Mundell presents a different, and surprisingly modern, analytical perspective. If a common money can be managed so that its general purchasing power remains stable, then the larger the currency area-even one encompassing diverse regions or nations subject to asymmetric shocks-the better.

Date: 2000-05
New Economics Papers: this item is included in nep-his and nep-mon
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