The Endogeneity Of Optimum Currency Area Criteria Intraindustry Trade And Emu Enlargement

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.

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.

Master's Thesis from the year 2002 in the subject Economics - Monetary theory and policy, grade: 1.0 (A), Technical University of Berlin (-), 54 entries in the bibliography, language: English, abstract: A rough 50 years after its foundation, the European Union (EU) is preparing for the probably most ambitious challenge of its existence, the binding-back into the West of the once centrally-planned economies of Central and Eastern Europe (CEEC). Together with political and general economic efforts, European monetary integration also gains speed with as many as twelve CEEC queuing up for entry into the EU (not including Turkey, which has not yet officially begun entry negotiations), the first of them most likely joining the Union already two years after the physical introduction of the single currency, i.e. in 2004. Many of these countries are eager to also join Monetary Union (EMU) and show their ability to be ′good Europeans′ by adopting the Euro as soon as possible. Various statements by both CEEC-government officials and monetary authorities exemplify this very vividly. This implies that the enlargement of EMU is already a relevant issue. By the time it becomes acute, positions and perspectives of both applicants and current members should be clear, if unnecessary delays and political irritations are to be avoided. The body of literature on the subject is thus as large as the questions of when, how and on what terms CEEC-accession will take place are pressing, and becoming more so as time progresses. This study attempts to coherently examine the core issues related to EMU-enlargement, equally synthesising the various segmented approaches of the academic debate, and deduce normative conclusions as to what strategic outlook should seem appropriate to both CEEC and the current EMU-12: In what timeframe should accession most sensibly take place? How appropriate are the mechanics leading up to EMU, most prominently the Exchange Rate Mechanism (ERM-II) and the Maastr

It is commonly argued that the successful stabilisation of asymmetric shocks in a monetary union requires, either flexible wages and/or labour mobility, absent inter-regional fiscal transfer payments. The current pattern of relative wage rigidity and labour inertia in Europe is thus viewed by many observers as a problematic factor in the successful functioning of the European common currency area. We investigate in the context of some historical case studies whether monetary integration can bring about a regime shift in the degree of labour market flexibility. Specifically, we employ econometric methods to test whether the onset of monetary union in the US and the Gold Standard in selected countries have rendered real wages more procyclical. Previously entitled: 'The Endogeneity of Optimum Currency Area Criteria in Historical Perspective - Some Lessons for European Monetary Union (EMU)' We find and qualify suggestive evidence from our empirical exercise that indeed a Lucas Critique argument applies so that monetary unions and credibly fixed exchange rate regimes in general might induce wages to carry the burden of macroeconomic adjustment in lieu of independent monetary policy and/or fiscal transfers. We argue that economic theory should borrow a leaf from the book of economic history and - rather than treating wage formation as exogenous - we consider the degree of real wage flexibility to depend upon the nature of the monetary policy regime. We conclude by relating our findings to the European Monetary Union (EMU).

Essay from the year 2005 in the subject Business economics - Economic Policy, grade: 1,2, Arnhem Business School (Arnhem Business School), course: International Economics, language: English, abstract: Since the beginning of the idea of the European Monetary Union (EMU), UK had a negative attitude towards a single monetary policy with a single currency. This antipathy was amplified on the one hand by the withdrawal of the European Exchange Rate Mechanism in 1992 caused by different economic policies, oil price rises and German unification and on the other hand by the launch of the EMU in 1999. In fact the UK government starts to work towards cooperation with the EMU by setting specific goals. But before taking further steps, the criteria of the Maastricht Treaty have to be fulfilled and the five economic tests assessed by the UK government have to be passed. Since 1997 the UK has made real progress towards meeting the five economic tests. Although there are arguments that in a long term the payback of joining EMU offset the costs, the benefits are too low and the costs too high at the moment. The idea of one currency in Europe has been around for many years. But according to Pitchford the true launching of the EMU process dates from the Werner Committee which was set up in 1970 and submitted its final report, called 'the Werner Report', in February 1971. The first major step for the implementation of the Werner plan was the European 'currency snake' in 1972. Through this arrangement the fluctuations between participants' exchange rates should be limited to ± 2.25%. However, this process was not effective because of the collapse of the Bretton-Woods regime which determined a fixed exchange rate in terms of gold. The UK joined the snake system just for one month. A further step was the creation of the European Monetary System (EMS) in 1979. The main objective of this system was to create monetary stability in Europe. This should be realized by the fixed rates between the currencies of the participating countries which where settled on their value against the European Currency Unit (ECU4). The UK did not join in the EMS and was still remote at the time of Delors Report in 1989.