In contrast to conventional analyses of monetary union between two particular countries or sets of countries, this paper treats the possible expansion of a given currency area as a continuous variable ranging from zero to one. More specifically, the paper attempts first to clarify the nature of the institutional changes required for currency area formation and second, to spell out the functional relationships between welfare and currency area formation. The geographic area in which a single currency would create the greatest economic benefit. Mundell it is patently obvious that periodic balanceofpayments crises will remain an integral feature of the international economic system as long as fixed exchange rates and rigid wage and price levels prevent the international price system from fulfilling a natural role in the adjustment process. This is the spatialgeographic counterpart of the currently dominating model of the nature and evolution of money, here termed m theory, whereby money is viewed as having developed from a private sector cost minimisation process to facilitate trading. The author focuses on the main classical contributions, then considers modern treatment of oca theory.
Daron acemoglu, jonathan parker, and michael woodford, editors. If values1,2,3,4, then merger of 3,4 reduces winning bid from 3 to 2. The theory of optimumcurrencyareas was conceived and developed in three highly influential papers, written by mundell 1961, mckinnon 1963 and kenen. Convergence and asymmetries in the employment dynamics of the european regions, ersa conference papers ersa99pa120, european regional science association. Usefulness of a currency grows with the size of the area costs due to diversity may also grow. Oca determine the economic and political mechanisms which help to reestablish equilibrium in the economy. Second, we assume that there is a regime shift that creates potential synergies. Abstract this paper surveys the optimum currency area oca literature. In final period of this phase the new theory of optimum currency area began predominating so called the classic theory of optimum currency area. Ss 2005 verena kuhn, agnes seeber theory of oca and the emu part 1. While traditionally each country has maintained its own separate, national. Although the basic tenets of the theory were anticipated during the late1940s and the 1950s, the.
Optimum currency area theory, central banking, transition, european union. Mundell has suggested that little in the way of a systematic attempt has been made to define the characteristics of an area over which it is optimal to have a single currency regime, orwhat is almost the same thing a fixed exchangerate system with guaranteed convertibility of currencies. The article deal with optimum currency area oca theory and examines which of the new eu member states are suitable candidates for the euro extended by eu10 countries membership. The oca theory serves as an approach for thinking about monetary integration and provides an explanation for the recent monetary integration processes in europe.
Operating synergy types and their impact on postmerger. A theory of optimum currency areas san francisco state. I also thank the participants in the conferences monetary policy implications of heterogeneity in a currency area, organized by the european central bank in 2004, 40 anni di attivita dellente einaudi 19652005 organized by ente. We also need to say that in practice very little of optimum currency area theory is concerned with the benefi ts of a single currency area. Optimum currency area theory is about weighing the balance between those advantages and those potential costs.
Apr 02, 2009 our theory of mergers is able to reconcile both of these stylized facts. Dynamics money illusion multiregional countries national currencies national money supplies number of currencies optimum currency area ployment pressure in region real income regional currency areas rency area separate currency single currency area stabilization. Monetary union emu and the optimum currency area oca theory. Economies form a currency area if they use the same legal tender or have their exchange rates irrevocably fixed. A suggested reformulation of the theory of optimal currency areas. A merger involves one companys purchasing the plant and equipment of another company. That debate has become very complex and the data requirements necessary for appropriate application of the principles developed are far beyond the means of the very nations for which the principles. The optimum currency area theory tries to explain whether it makes economic sense for a group of countries to abandon their national currencies. Expert answer optimum currency area oca is a geographical region where a single currency creates greater economic benefit. The optimum currency area oca theory tries to answer an almost prohibitively. The failure to address the issues that concern merger and acquisition impacts the new and current organization very negatively at the stage of postmerger in two levels.
Crossborder banking mergers in europe have been less common until recently, because they. A suggested reformulation of the theory of optimal. The theory of optimum currency areas, trade adjustment and trade, cepr discussion papers 847, c. European economic and monetary integration, and the optimum. Results also support the common expectation that organizational complexity is a. What are the pros and cons of creating such currency areas in the current eu members. European monetary union, convergence and sustainability. The difficulty of the question leads to a low operational precision of oca theory.
F12,f15,f2,f36 abstract this paper studies how capital market imperfections affect the welfare effects of forming a currency union. On the other hand, a common currency imposes costs, in the. Theory formulates conditions when this is possible. A theory of optimum currency areas it is patently obvious that periodic balanceofpayments crises will remain an integral feature of the international economic system as long as fixed ex change rates and rigid wage and price levels prevent the terms of trade from fulfilling a natural role in the adjustment process. Merger analysis, industrial organization theory, and. Capital market imperfections and the theory of optimum. A model if an optimum currency area international monetary fund. The theory is used often to argue whether or not a.
An optimum currency area oca is a theoretical notion. Therefore, we argue that the oca theory is a framework for discussion about monetary integration. In our forthcoming journal of finance article eat or be eaten. Although the share of intraeu trade has increased since the introduction of the euro, dissimilarities in economic structure combined with high degrees of industrial specialisation have increased the emu. This paper aims at providing an eclectic analysis of the theory of optimum currency areas oca. It is here that conventional wisdom and enlightened economic analysis part company most starkly. Merger analysis, industrial organization theory, and merger. Optimum currency area, a currency area in which the benefits of using a common currency outweigh the costs of individual economies giving up their own currencies. Countries within it are highly integrated with each other i.
The underlying theory describes the optimal characteristics for the merger of. Willig department of justice merger analysis, industrial organization theory, and merger guidelines the leadership of the antitrust division of the u. To date, academic researchers have not yet proposed a complete theory that completely and. The underlying theory describes the optimal characteristics for the merger of currencies or the creation of a new currency. The optimum currency area oca theory tries to answer an almost prohibitively difficult question. Optimum currency areas in a recent note 4, robert a. Starting with friedman and mundell the academic literature has conducted a high level debate concerning the design of crosscountry monetary arrangements. Theory of optimum currency areas and the european monetary union. Scott adjustment under fixed argument for flexible assume bank can expand based on national capital mobility causes unemployment central banks common currency currency area comprising degree of factor degree of money east econ economists entities exchange rates based experimented with flexible factor immobility factors are mobile fixed. Jul 08, 2016 according to this theory if the management of firm a is more efficient than the management of firm b and after firm a acquires firm b the efficiency of firm b is brought upto the level of efficiency of firm a. A theory of optimum currency areas robert alexander. Following the first great merger wave that began at the end of the 19th century, several studies tried to explain its causes and effects. An optimal currency area oca is a geographical region where it is thought a single currency would help to maximise welfare and enhance macroeconomic performance an oca works best when 1.
This can be obviously linked to the limitations of the oca. An international currency is one that is used and held beyond the borders of the issuing country, not merely for transactions with that countrys residents, but also, and importantly, for transactions between nonresidents. Department of accounting, chaoyang university of technology. This contributed to creation the new theory of optimum currency area and arising of debate on sizes of currency area and deadline of the currency area creation tavlas 1993.
Basis for horizontal merger it may be social gain as well as private gain. Consequently it is also diminishing with the size of the currency area. A theory of optimum currency areas1 san francisco state. A model of an optimum currency area, economics discussion papers 200745, kiel institute for the world economy ifw. Two of the most important stylized facts about mergers are the following. Section 6 considers some political and constitutional aspects of membership in a common currency arrangement. The purpose of this note is to synthesize and extend the existing theory of optimum currency areas. The optimum currency area theory and the emu intereconomics. Optimum currency area, economic and monetary integration, international. A currency thoery based on geographical area that adopts a fixed exchange rate regime or a single currency within its boundaries.
For example, under managerial control, if a company has an excessive cash flow, the manager is more likely to further. The project of establishing a european monetary union has stimulated new interest in the theoretical and empirical investigation of optimum currency areas. The traditional optimal currency area approach draws its insights largely from an economic environment in which there exists shortrun price stickiness and employment adjustment to shocks, accompanied by a longerrun inflationemployment tradeoff. According to this theory if the management of firm a is more efficient than the management of firm b and after firm a acquires firm b the efficiency of firm b is brought upto the level of efficiency of firm a. Obviously these benefi ts depend on potential economic interactions. A theory of mergers and firm size we propose a theory of mergers that combines managerial merger motives with an industrylevel regime shift that may lead to valueincreasing merger opportunities. A modern reconsideration of the theory of optimal currency areas. In a similar vein, a single currency will increase market transparency and this translates into a benefit by reducing the cost of information gathering. Although the share of intraeu trade has increased since the introduction of the euro, dissimilarities in economic structure combined with high degrees of industrial specialisation. This pdf is a selection from a published volume from the. A model of an optimum currency area, discussion papers, series ii 305, university of konstanz, collaborative research centre sfb 178 internationalization of the economy. Unfortunately, conventional optimal currency area theory is quite deficient. The eurozone crisis has revealed certain shortcomings of the emu, such as its vulnerability to asymmetric shocks and its inability to act as predicted by the theory of optimum currency areas. But the theory does at least give us some insight into the trade offs.
Page 3 of 22 and acquisitions, may be able to extract value for themselves in several ways. A theory of optimum currency areas robert alexander mundell. The failure to address the issues that concern merger and acquisition impacts the new and current organization very negatively at the stage of post merger in two levels. This paper surveys the optimum currency area oca literature. In a currency area characterized by labor immobility, relative price stickiness, and decentralized. One of these two levels is the individual level and the reactions of the individual employees are insecurity, powerlessness, alienation, a drop in productivity, loss of energy. 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.
The endogenity of the optimum currency area criteria pdf. This pdf is a selection from a published volume from the national bureau of economic research volume title. Much of the economic analysis of moving to emu has been undertaken within the context of the optimal currency area paradigm. Robert mundell and the theoretical foundation for the. Citations of the new theory of optimum currency areas. However, empirical studies have been unable to draw clearcut conclusions on the optimality of the cfa zone. We make also systematic reference to the european experience with economic and monetary union emu, which is the most important example of recently. Theoretical background introduction costs and benefits the old oca theory. Nber macroeconomics annual 2012, volume 27 volume authoreditor.
This relation establishes the link of postmerger performance improvements towards shareholder value creation. Since theory has low operational precision and oca criteria are. It is concluded that postmerger performance improvements prove the existence of mergerinduced synergy. An optimal currency area oca is a geographical region where it is thought a single currency would help to maximise welfare and enhance macroeconomic performance. A modern reconsideration of the theory of optimal currency. The optimum currency area theory and the emu springerlink. First, there is a persistent confusion between nominal wage and price rigidities the sine qua non of monetary policy and real or structural rigidities, distortions and inefficiencies. First, we assume that managers derive private benefits from operating a firm in addition to the value of any ownership share of the firm they have.
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