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Optimum currency area (:star: Criteria for OCA (Product diversification by…
Optimum currency area
:star: Criteria for OCA
Product diversification by Kenen
Source of problems is the specialisation of production
Labour mobility by Mundell
OCAs are those within which people move easily
Openness by McKinnon
Countries which are very open to trade and trade heavily with each other form an OCA
Fiscal transfers
Countries that agree to compensate each other for adverse shocks form an OCA
Homogeneous preferences
Currency union member countries must share a wide consensus on the way to deal with shocks
Solidarity vs. Nationalism
When the common monetary policy gives rise to conflicts of national interests, the countries that form a currency area need to accept the costs in the name of a common destiny
:fire: Eurozone revised
:red_cross: Fiscal transfers
:red_cross: Labour mobility
:check: Trade openness
:warning: Homogeneous preferences
:check: Product diversification
:question: Common destiny
:check: Pros
No need in risky currency transactions
Positive marginal benefit
Single currency acceptable everywhere within the area
Trade growth faster among OCA members than non-members
:red_cross: Cons
Asymmetric Shocks
Symmetric shocks with asymmetric effects