The Endogeneity of the Optimum Currency Area Criteria

35 Pages Posted: 3 Oct 1996 Last revised: 31 Jul 2022

See all articles by Jeffrey A. Frankel

Jeffrey A. Frankel

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Andrew Kenan Rose

University of California - Haas School of Business; NUS Business School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: August 1996

Abstract

A country's suitability for entry into a currency union depends on a number of economic conditions. These include, inter alia, the intensity of trade with other potential members of the currency union, and the extent to which domestic business cycles are correlated with those of the other countries. But international trade patterns and international business cycle correlations are endogenous. This paper develops and investigates the relationship between the two phenomena. Using thirty years of data for twenty industrialized countries, we uncover a strong and striking empirical finding: countries with closer trade links tend to have more tightly correlated business cycles. It follows that countries are more likely to satisfy the criteria for entry into a currency union after taking steps toward economic integration than before.

Suggested Citation

Frankel, Jeffrey A. and Rose, Andrew Kenan and Rose, Andrew Kenan, The Endogeneity of the Optimum Currency Area Criteria (August 1996). NBER Working Paper No. w5700, Available at SSRN: https://ssrn.com/abstract=4283

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Andrew Kenan Rose

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