Optimum Currency Areas

Waltraud Schelkle

Economies form a currency area if they use the same legal tender or have their exchange rates irrevocably fixed. An optimum currency area is a theoretical notion, which suggests extending the size of a currency area to the point where the benefits of using a common currency just outweigh the costs of giving up one's own currency. The literature on what determines the possible benefits and costs flourished until about the mid-1970s and then fell into oblivion. European monetary integration led to a renaissance of the theory of optimum currency areas (OCA), culminating in the 1999 award of the Nobel Prize to Robert Mundell. His seminal article in 1961 framed the problem of forming a currency area in purely economic terms. It amounts to a cost-benefit analysis of irrevocably fixing the exchange rate. Countries that form a currency area lose, on the one hand, the exchange rate as a presumably ...

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