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Optimum currency areas and the European experience

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  • Ronald McKinnon

Abstract

Across nations or regions, the debate on optimum exchange rate cum monetary policies is not yet resolved on three levels. First is the optimum domain of fixed exchange rates versus keeping them flexible. Second is the subordinate debate on whether one needs full monetary union (as in continental Europe) to secure an optimum currency area's internal domain; or, whether virtually fixed exchange rates — where national currencies remain in circulation — can be sufficient. Third is whether a regional grouping of economies with close trade ties (as in East Asia) gain by collectively pegging to an outside currency such as the US dollar. Using an axiomatic approach, which limits the set of cross‐country financial claims to what is feasible, I analyse how best to both share and reduce macroeconomic risks on these three levels. JEL classification: F31, F36.

Suggested Citation

  • Ronald McKinnon, 2002. "Optimum currency areas and the European experience," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 10(2), pages 343-364, July.
    • Handle: RePEc:bla:etrans:v:10:y:2002:i:2:p:343-364
    DOI: 10.1111/1468-0351.00115
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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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