Testing Mundell's Intuition of Endogenous OCA Theory

13 Pages Posted: 27 Apr 2009

See all articles by Thierry Warin

Thierry Warin

HEC Montreal; CIRANO

Phanindra V. Wunnava

affiliation not provided to SSRN

Hubert Janicki

Arizona State University (ASU)

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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.

Suggested Citation

Warin, Thierry and Wunnava, Phanindra V. and Janicki, Hubert, Testing Mundell's Intuition of Endogenous OCA Theory. Review of International Economics, Vol. 17, Issue 1, pp. 74-86, February 2009. Available at SSRN: https://ssrn.com/abstract=1381790 or http://dx.doi.org/10.1111/j.1467-9396.2008.00802.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/

Phanindra V. Wunnava

affiliation not provided to SSRN

No Address Available

Hubert Janicki

Arizona State University (ASU) ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

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