Are Optimum Currency Area Oca Theory Criteria Endogenous To Regime Change

This essay considers some prescriptions that are currently popular regarding exchange rate regimes: a general movement toward floating, a general movement toward fixing, or a general movement toward either extreme and away from the middle. The whole spectrum from fixed to floating is covered (including basket pegs, crawling pegs, and bands), with special attention to currency boards and dollarization. One overall theme is that the appropriate exchange rate regime varies depending on the specific circumstances of the country in question (which includes the classic optimum currency area criteria, as well as some newer criteria related to credibility) and depending on the circumstances of the time period in question (which includes the problem of successful exit strategies). Latin American interest rates are seen to be more sensitive to US interest rates when the country has a loose dollar peg than when it has a tight peg. It is also argued that such relevant country characteristics as income correlations and openness can vary over time, and that the optimum currency area criterion is accordingly endogenous.

He optimum currency areas (OCA) theory deals with the criteria as well as the costs and benefits of for countries to enter/form a common currency area. The traditional OCA theory explores the economic variables determining the boarders for OCA, and whether a single country fulfills the requirements to join an OCA by employing the static costs and benefits analysis. The endogenous OCA theory introduces the long-run dynamic equilibrium analysis into the cost-benefit balance model and suggests that economic and monetary integration are self reinforcing processes, i.e., the endogenous nature of OCA criteria may make a country be more likely to satisfy the criteria for the entry into a currency union ex post though it fails ex ante, which in turn reduces the costs of a currency union by increasing the symmetry of disturbances. Although the creation of the euro is often cited as the most modern and largest-scale case study of OCA, the evolvement of economic integration in other regions, especially East Asia, has increased interest in the viability of a common currency for economies in these regions. The previous studies in Euro Union could provide us new perspective and useful instruments of analysis with respect to the study on other regions. This paper surveys the evolution of the theoretical and empirical studies on endogeneities of OCA criteria in order to draw inferences for the prospects and challenges of greater monetary cooperation in other regions.

This paper tests an endogeneity hypothesis of optimum currency area (OCA) criteria (Frankel and Rose, 1998) on a cross-section of OECD countries between 1990 and 1999. The findings indicate that convergence of business cycles relates to intra-industry trade, but has no direct relation between business cycles and bilateral trade intensity. As far as intra-industry trade is positively correlated with trade intensities, this result confirms the OCA endogeneity hypothesis. The endogeneity of OCA linkage criteria implies extensive business cycle harmonization between CEECs and EU countries in the medium term. Published in: Contemporary Economic Policy vol. 22, no 1 (2004) pp. 1-12, ISSN 1074-3529.

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''In summary, the book is valuable as a textbook both at the advanced undergraduate level and at the graduate level. It is also very useful for the economist who wants to be brought up-to-date on theoretical and empirical research on exchange rate behaviour.'' ""Journal of International Economics""

Using recent advances in the classification of exchange rate regimes, this paper finds no support for the popular bipolar view that countries will tend over time to move to the polar extremes of free float or rigid peg. Rather, intermediate regimes have shown remarkable durability. The analysis suggests that as economies mature, the value of exchange rate flexibility rises. For countries at a relatively early stage of financial development and integration, fixed or relatively rigid regimes appear to offer some anti-inflation credibility gain without compromising growth objectives. As countries develop economically and institutionally, there appear to be considerable benefits to more flexible regimes. For developed countries that are not in a currency union, relatively flexible exchange rate regimes appear to offer higher growth without any cost in credibility.