Optimum Currency Areas and the European Experience
Posted: 29 Mar 2002
Across nations or regions, the debate on optimum exchange rate cum monetary policies is not yet resolved on three levels. First is the optimum domain of fixed exchange rates versus keeping them flexible. Second is the subordinate debate on whether one needs full monetary union (as in continental Europe) to secure an optimum currency area's internal domain; or, whether virtually fixed exchange rates - where national currencies remain in circulation - can be sufficient. Third is whether a regional grouping of economies with close trade ties (as in East Asia) gain by collectively pegging to an outside currency such as the U.S. dollar. Using an axiomatic approach which limits the set of cross-country financial claims to what is feasible, I analyze how best to both share and reduce macro economic risks on these three levels.
Keywords: Foreign Exchange, Financial Integration
JEL Classification: F31, F36
Suggested Citation: Suggested Citation