In economics, an optimum currency area (OCA), also known as an optimal currency region (OCR), is a geographical region in which it would maximize economic efficiency to have the entire region share a single currency. It describes the optimal characteristics for the merger of currencies or the creation of a new currency. The theory is used often to argue whether or not a certain region is ready to become a monetary union, one of the final stages in economic integration. Face-to-face trading interactions on the New York Stock Exchange trading floor. ... In economics, a monetary union is a situation where several countries have agreed to share a single currency (also known as a unitary or common currency) among them, for example, the East Caribbean dollar. ... Economic integration is a term used to describe how different aspects between economies are integrated. ...

An optimal currency area may often be larger than a country. For instance, part of the rationale behind the creation of the euro is that the individual countries of Europe do not each form an optimal currency area, but that Europe as a whole does form an optimal currency area. “EUR” redirects here. ...

In theory, an optimal currency area could also be smaller than a country. Some economists have argued that the United States, for example, really consists of two optimal currency areas and that the United States should have two currencies, one for the western half and one for the eastern half.

The theory of the optimal currency area was pioneered by economist Robert Mundell.^[1] Credit often goes to Mundell as the originator of the idea, but others point to earlier work done in the area by Abba Lerner.^[2] Robert Alexander Mundell CC (born October 24, 1932) is a professor of economics at Columbia University. ... ...

Criteria

The three principal characteristics of an OCA are:

• Labor mobility across the region. This includes physical ability to travel (visas, worker's rights, etc.), lack of cultural barriers to free movement (such as different languages) and institutional arrangements (such as the ability to have superannuation transferred and to the new region).
• Openness with capital mobility and price and wage flexibility across the region. This is so that the market forces of supply and demand automatically distribute money and goods to where they are needed. In practice this does not work perfectly as there is no true wage flexibility.(Ronald McKinnon)
• An automatic fiscal transfer mechanism to redistribute money to areas/sectors which have been adversely affected by the first two characteristics. This usually takes the form of taxation redistribution to less developed areas of a country/region. This policy, though theoretically accepted, is politically difficult to implement as the better-off regions rarely give up their revenue easily.

Additional criteria suggested for the OCA theory are: A pension (also known as superannuation) is a retirement plan intended to provide a person with a secure income for life. ... In economics and business, the price is the assigned numerical monetary value of a good, service or asset. ... A wage is a compensation which workers receive in exchange for their labor. ... Look up supply in Wiktionary, the free dictionary. ... The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). ... Ronald McKinnon (born September 20, 1973 in Fort Rucker, Alabama) is an American football linebacker, currently a free agent in the NFL. He was originally signed as an undrafted free agent by the Arizona Cardinals out of the University of North Alabama. ... Fiscal municipality in Huesca, Spain The term fiscal refers to government debt, expenditures and revenues, or to finance (particularly financial revenue) in general. ...

• Production diversification (Peter Kenen)
• Homogeneous preferences
• Commonality of destiny

The primary criticism of Mundell's theory is that the only area that has optimal conditions for a single currency is one that already has a single currency, a circular argument. Furthermore, many existing currency areas do not fulfill these requirements. Peter B. Kenen (b. ... Begging the question, in modern popular usage, is often used synonymously for raising the question. However the original meaning is quite different: it described a type of logical fallacy (also called petitio principii) in which the evidence given for a proposition as much needs to be proved as the proposition...

This theory has been most frequently applied in recent years to the Euro and the European Union. By these criteria the European Union does not constitute an Optimal Currency Area and therefore the Euro should not be a successful union of currencies.^{[citation needed]} However it is hoped that the creation of the Euro will in itself help encourage the conditions enumerated by Mundell. “EUR” redirects here. ...

Notes

1. ^ http://www.businessweek.com/1999/99_43/b3652085.htm
2. ^  Tibor Scitovsky. "Lerner's Contribution to Economics." Journal of Economic Literature, Vol. 22, No. 4. (Dec., 1984), pp. 1547-1571. http://links.jstor.org/sici?sici=0022-0515%28198412%2922%3A4%3C1547%3ALCTE%3E2.0.CO%3B2-R (subscription required)

References

• Baldwin, Richard and Charles Wyplosz. The Economics of European Integration. New York: McGraw Hill, 2004.

See also

• Optimal Currency Area - Eurozone