Testing Mundell's Intuition of Endogenous OCA Theory

26 Pages Posted: 6 Oct 2008

See all articles by Thierry Warin

Thierry Warin

HEC Montreal; CIRANO

Phani V. Wunnava

Middlebury College; Institute for the Study of Labor (IZA)

Hubert Janicki

U.S. Census Bureau

Multiple version iconThere are 2 versions of this paper

Abstract

This paper presents an empirical assessment of the endogenous optimum currency area theory. Frankel and Rose (1998) study the endogeneity of a currency union through the lens of international trade flows. Our study extends Frankel and Rose's model by using FDI flows to test the original theory developed by Mundell in 1973. A gravity model is used to empirically assess the effectiveness of the convergence criteria by examining location specific advantages that guide multinational investment within the European Union. A fixed effects model based on a panel data of foreign direct investment (FDI) flows within the EU-15 shows that horizontal investment promotes the diffusion of the production process across the national border. Specifically, our results suggest that economic convergence ensured by belonging to the common currency area helps double FDI flows.

Keywords: economic integration, gravity model, endogenous optimum currency area

JEL Classification: C23, C52, F15

Suggested Citation

Warin, Thierry and Wunnava, Phani V. and Janicki, Hubert, Testing Mundell's Intuition of Endogenous OCA Theory. IZA Discussion Paper No. 3739. Available at SSRN: https://ssrn.com/abstract=1278940 or http://dx.doi.org/10.1111/j.0042-7092.2007.00700.x

Thierry Warin (Contact Author)

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H2X 2L3
Canada

CIRANO ( email )

2020 rue University, 25th floor
Montreal H3C 3J7, Quebec
Canada

HOME PAGE: http://works.bepress.com/warin/

Phani V. Wunnava

Middlebury College ( email )

Middlebury, VT 05753
United States

Institute for the Study of Labor (IZA) ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Hubert Janicki

U.S. Census Bureau

4600 Silver Hill Road
Washington, DC 20233
United States

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