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. Optimum currency area theory, central banking, transition, european union. Ss 2005 verena kuhn, agnes seeber theory of oca and the emu part 1. The theory is used often to argue whether or not a. This paper surveys the optimum currency area oca literature. Broadly, the studies find and the theory puts forth that there is a higher consequence arising from preexisting structural characteristics, over those that are cultural. It is concluded that postmerger performance improvements prove the existence of mergerinduced synergy.
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. Apr 02, 2009 our theory of mergers is able to reconcile both of these stylized facts. To date, academic researchers have not yet proposed a complete theory that completely and. The difficulty of the question leads to a low operational precision of oca theory. Expert answer optimum currency area oca is a geographical region where a single currency creates greater economic benefit. 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.
Consequently it is also diminishing with the size of the currency area. Operating synergy types and their impact on postmerger. A theory of optimum currency areas1 san francisco state. The optimum currency area theory tries to explain whether it makes economic sense for a group of countries to abandon their national currencies. Countries within it are highly integrated with each other i. We make also systematic reference to the european experience with economic and monetary union emu, which is the most important example of recently. A model if an optimum currency area international monetary fund. Page 3 of 22 and acquisitions, may be able to extract value for themselves in several ways. Results also support the common expectation that organizational complexity is a. Unfortunately, conventional optimal currency area theory is quite deficient. 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. 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.
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. Daron acemoglu, jonathan parker, and michael woodford, editors. The optimum currency area oca theory tries to answer an almost prohibitively. Abstract this paper surveys the optimum currency area oca literature. 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. For example, under managerial control, if a company has an excessive cash flow, the manager is more likely to further. 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. Supply is assumed to be highly elastic, once demand is.
Willig department of justice merger analysis, industrial organization theory, and merger guidelines the leadership of the antitrust division of the u. Starting with friedman and mundell the academic literature has conducted a high level debate concerning the design of crosscountry monetary arrangements. In our forthcoming journal of finance article eat or be eaten. 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. Optimum currency area, economic and monetary integration, international.
The project of establishing a european monetary union has stimulated new interest in the theoretical and empirical investigation of optimum currency areas. Crossborder banking mergers in europe have been less common until recently, because they. The theory of optimum currency areas, trade adjustment and trade, cepr discussion papers 847, c. A model of an optimum currency area, economics discussion papers 200745, kiel institute for the world economy ifw. 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 approach can help us to identify and possibly to estimate costs and benefits of adopting a common currency. European monetary union, convergence and sustainability. 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 currency thoery based on geographical area that adopts a fixed exchange rate regime or a single currency within its boundaries. Although the basic tenets of the theory were anticipated during the late1940s and the 1950s, the. 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. The geographic area in which a single currency would create the greatest economic benefit. Second, we assume that there is a regime shift that creates potential synergies. Therefore, we argue that the oca theory is a framework for discussion about monetary integration.
Much of the economic analysis of moving to emu has been undertaken within the context of the optimal currency area paradigm. Theoretical background introduction costs and benefits the old oca theory. Reconsideration of the theory of optimal currency area. 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. 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 underlying theory describes the optimal characteristics for the merger of currencies or the creation of a new currency. While traditionally each country has maintained its own separate, national. Merger analysis, industrial organization theory, and merger. Section 6 considers some political and constitutional aspects of membership in a common currency arrangement. Merger analysis, industrial organization theory, and. The endogenity of the optimum currency area criteria pdf. Mergers are thus forms of investment, and can be explained like other purchases of plant and equipment using the qtheory of investment jovanovic and rousseau, 2002.
Monetary union emu and the optimum currency area oca theory. A merger involves one companys purchasing the plant and equipment of another company. F12,f15,f2,f36 abstract this paper studies how capital market imperfections affect the welfare effects of forming a currency union. This can be obviously linked to the limitations of the oca. But the theory does at least give us some insight into the trade offs. Following the first great merger wave that began at the end of the 19th century, several studies tried to explain its causes and effects. In a currency area characterized by labor immobility, relative price stickiness, and decentralized.
The theory of optimumcurrencyareas was conceived and developed in three highly influential papers, written by mundell 1961, mckinnon 1963 and kenen. This pdf is a selection from a published volume from the. The purpose of this note is to synthesize and extend the existing theory of optimum currency areas. 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. Theory of optimum currency areas and the european monetary union. This relation establishes the link of postmerger performance improvements towards shareholder value creation.
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. Two of the most important stylized facts about mergers are the following. July 9, 2011 abstract this paper studies how within and crosscountry capital market imperfections a. The underlying theory describes the optimal characteristics for the merger of. Economies form a currency area if they use the same legal tender or have their exchange rates irrevocably fixed. However, empirical studies have been unable to draw clearcut conclusions on the optimality of the cfa zone.
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. What are the pros and cons of creating such currency areas in the current eu members. The optimum currency area theory and the emu intereconomics. Basis for horizontal merger it may be social gain as well as private gain. 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.
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. The optimum currency area oca theory tries to answer an almost prohibitively difficult question. In a similar vein, a single currency will increase market transparency and this translates into a benefit by reducing the cost of information gathering. A modern reconsideration of the theory of optimal currency areas. 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.
Theory formulates conditions when this is possible. This pdf is a selection from a published volume from the national bureau of economic research volume title. 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. 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. 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.
Usefulness of a currency grows with the size of the area costs due to diversity may also grow. Capital market imperfections and the theory of optimum. European economic and monetary integration, and the optimum. Nber macroeconomics annual 2012, volume 27 volume authoreditor. If values1,2,3,4, then merger of 3,4 reduces winning bid from 3 to 2. Capital market imperfections and the theory of optimum currency areas pierrerichard agenor and joshua aizenman nber working paper no. A modern reconsideration of the theory of optimal currency. The underlying theory describes the optimal characteristics for the merger of currencies or the creation of a new currency. It is here that conventional wisdom and enlightened economic analysis part company most starkly. On the other hand, a common currency imposes costs, in the.
Department of accounting, chaoyang university of technology. Oca determine the economic and political mechanisms which help to reestablish equilibrium in the economy. 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. A theory of optimum currency areas robert alexander. 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. The optimum currency area theory and the emu springerlink. Citations of the new theory of optimum currency areas.
Since theory has low operational precision and oca criteria are. This paper aims at providing an eclectic analysis of the theory of optimum currency areas oca. Convergence and asymmetries in the employment dynamics of the european regions, ersa conference papers ersa99pa120, european regional science association. A model of an optimum currency area, discussion papers, series ii 305, university of konstanz, collaborative research centre sfb 178 internationalization of the economy. 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. A theory of optimum currency areas robert alexander mundell. This issue has been mainly studied by referring to the optimum currency area oca criteria. A suggested reformulation of the theory of optimal. Obviously these benefi ts depend on potential economic interactions.
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. The author focuses on the main classical contributions, then considers modern treatment of oca theory. An optimum currency area oca is a theoretical notion. Robert mundell and the theoretical foundation for the. A theory of optimum currency areas san francisco state. 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. 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. 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. A suggested reformulation of the theory of optimal currency areas. 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. Optimum currency areas in a recent note 4, robert a. Optimum currency area theory is about weighing the balance between those advantages and those potential costs.
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