Optimum Currency Area
Optimum Currency Area (OCA) is a group of countries which is practical to participate in a monetary union with adopting a common currency; the theory of OCA has been developed by Robert Alexander Mundell, Ronald McKinnon and Peter Kenen. A common currency is expected to maximise economic efficiency, due to price transparency and the reduction of exchange rate risks and currency conversion costs (Robson, 1998: 193). Nevertheless, a monetary union basically assimilates fixed-exchange rate system within the union; the member states must abandon exchange-rate adjustment, which is the most effective way to handle economic shocks (ibid: 197). It is presupposed that asymmetric shocks should not hit the area; if one of the members …show more content…
The member states in a monetary union are not always equivalent economies; McKinnon (1963) claimed that if they suffer from economic crises through market mechanisms of trade, it is an usual area of a common currency. If individual economies do not open their trade markets, demand shocks could severely hit national economy and encroach on GDP or price levels in the national market. Conversely, if the national markets are highly opened, they can equilibrate intra-economic performance and deal with those shocks. In terms of this, the Eurozone is recognised as OCA, yet the zone is not considered as OCA from the viewpoint of labour mobility because of linguistic divergences; thus, it is arguable whether the Eurozone is OCA (Swoboda, …show more content…
According to Viner (1950: 56), trade diverting occurs when a nation shift imports from cheap outside areas to expensive CU members, since though production costs in a new exporter in CU are more expensive than those of an ex-exporter outside the world, the total costs including tariffs and production costs in an ex-partner tend to be more expensive compared to a new partner. Ergo, this mechanism can encroach on economic welfare with reducing the
Optimum Currency Area (OCA) is a group of countries which is practical to participate in a monetary union with adopting a common currency; the theory of OCA has been developed by Robert Alexander Mundell, Ronald McKinnon and Peter Kenen. A common currency is expected to maximise economic efficiency, due to price transparency and the reduction of exchange rate risks and currency conversion costs (Robson, 1998: 193). Nevertheless, a monetary union basically assimilates fixed-exchange rate system within the union; the member states must abandon exchange-rate adjustment, which is the most effective way to handle economic shocks (ibid: 197). It is presupposed that asymmetric shocks should not hit the area; if one of the members …show more content…
The member states in a monetary union are not always equivalent economies; McKinnon (1963) claimed that if they suffer from economic crises through market mechanisms of trade, it is an usual area of a common currency. If individual economies do not open their trade markets, demand shocks could severely hit national economy and encroach on GDP or price levels in the national market. Conversely, if the national markets are highly opened, they can equilibrate intra-economic performance and deal with those shocks. In terms of this, the Eurozone is recognised as OCA, yet the zone is not considered as OCA from the viewpoint of labour mobility because of linguistic divergences; thus, it is arguable whether the Eurozone is OCA (Swoboda, …show more content…
According to Viner (1950: 56), trade diverting occurs when a nation shift imports from cheap outside areas to expensive CU members, since though production costs in a new exporter in CU are more expensive than those of an ex-exporter outside the world, the total costs including tariffs and production costs in an ex-partner tend to be more expensive compared to a new partner. Ergo, this mechanism can encroach on economic welfare with reducing the