How Many Monies? A Genetic Approach to Finding Optimum Currency Areas

Abstract

Recent moves towards greater monetary integration in Western Europe - and disintegration in Eastern Europe and the former Soviet Union - have rekindled interest in the theoretical and empirical aspects of optimal currency area (OCA). In this paper, we examine the marginal benefit of increasing the number of currency unions within a given geographical area. We look at six regions; the United States, Europe, the G7, the CFA zone, the FSU and the world at large. Our results suggest that (i) contiguous monetary unions are typically dominated by non-contiguous unions; (ii) neither Europe nor the United States form an optimum currency area, for both regions the costs of adopting a single currency exceeds estimates of the transaction cost savings; (iii) Germany and the United States will almost never find it to their (economic) advantage to join monetary unions.

JEL Classification: E42