The Theory of Optimum Currency Areas Essay -- Eurozone Countries, Comm

The theory of optimal notes areas (oca) explores the conditions under which a common funds can maximize the economic efficiency of a region. It strives to identify the essential characteristics for forming a common currency zone as well as its possible costs and benefits. The research has also provided more insight into the area of optimum transfigure rate management. The phrase optimum currency area was first coined by Mundell in 1961 in his creative paper entitled A Theory of Optimum Currency Areas. Since indeed the theory has seen little development and the subject area has often lacked prudence from economists. However, the formation of a European Monetary Union (EMU) has stimulated a resurgence of interest in the topic. (Citation)The cosmea of the EMU has been an ambition of the European Union (EU) since the late 1960s. However, the timeline for achieving the EMU and a common currency was not agreed upon until the signing of the Maastricht Treaty of 1992. The treaty eli minated the national barriers to the movement of goods, wear upon and capital within the EU, as well as planning the creation of the euro currency and the European Central Bank. (Bean, 1992) The euro was finally adopted on the beginning(a) Dec 1999 by eleven of the EU countries - as well as the Vatican, Andorra, Monaco and San Marino - and has subsequently been expanded further to Greece, Slovenia, Cyprus, Malta, Slovakia, Montenegro and Estonia. (Citation)When Mundell introduced the OCA theory, the EMU was not a consideration and it was merely seen as an academic question. Mundell began by defining a currency area as a domain within which exchange rates are fixed and posed the prominent question What is the catch domain of a currency area?. To tackl... ...f incomes and extent of trade amoung the members. The OCA line is downward sloping as the advantages of a common currency depend positively on trade and negatively on income correlation. The higher(prenominal) and further righ t the points are the more benefitial a common currency would be. Points that are low and left should float their own individual currency. He declared that a common currency for Germany, Belgium, Luxembourg and Netherlands would be plus but would be a hindrance for Europe as a whole. However, Frankel outlined that The OCA Criterion Might Be Satisfied Ex Post, Even If Not Ex Ante. He expanded by stating that through the formation of a common currency area countries that were downstairs the OCA line could end up above it. Frankel indentified this would happen receivable to increased trade integration which causes a higher income correlation. (Frankel, 1999)