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Is Europe an optimum currency area - Literature review Example

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Is Europe an Optimum Currency Area? - A Literature Review Name of the Student Subject Name of the Concerned Professor 4 May 2011 An Optimum Currency Area or an Optimal Currency Region are the terms used to refer to such a geographical zone where the sharing of a single currency by the entire region leads to the maximization of economic efficiency (McNamara 1999)…
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Download file to see previous pages This phenomenon has allowed for a vantage point to the economists from where they can try understanding the possible problems and difficulties associated with economic integration. The objective of this literature review is to understand the criteria essential to the achievement of Optimum Currency Areas in the light of the existing academic sources and theories. This literature review also intends to understand whether the European Economic and Monetary Union are gradually shifting towards an Optimum Currency Area position. It is Robert Mundell who is attributed to be the pioneer of the theory of Optimum Currency Area. Vasiliauskaite and Vitakauskas (2007) have successfully identified certain criteria delineated by Mundell to be necessary for the existence of a viable currency union. As per Mundell, for a region to move towards an Optimum Currency Position, the labour mobility is a necessary and pivotal requirement (Vasiliauskaite & Vitakauskas 2007). The labour mobility in this context includes the physical ability and possibility on the part of the labour in a region to move from the depressed areas to the propitious ones. This mobility criterion also entails an absence of the cultural and political barriers to labour mobility and the existence of viable institutional mechanisms to facilitate mobility of labour (Vasiliauskaite & Vitakauskas 2007). Besides, According to Mundell, the monetary union in a region required an integration of the financial markets of the member nations accompanied by a total flexibility of prices and wages across the region (Vasiliauskaite & Vitakauskas 2007). Also, Mundell tagged to these criteria the need for a regional political integration making way for the fiscal transfer mechanisms for the redistribution of capital around an Optimum Currency Area (Vasiliauskaite & Vitakauskas 2007). Besides, it is also imperative that most of the nations in an Optimum Currency Area have diversified economies and similar business cycles (Vasiliauskaite & Vitakauskas 2007). Vasiliauskaite and Vitakauskas (2007) have concluded after an elaborate analysis of the existing data that though the European Economic and Monetary Union does qualify many of the criteria considered by Mundell to be essential for the creation of an Optimum Currency Area, the labour mobility in the European Union is much constrained as compared to USA. In Europe there exist many cultural and economic barriers that hamper the hassle free mobility of labour. Also the European Union, unlike America, cannot rely on Fiscal Federalism to iron out the regional economic disturbances (Vasiliauskaite & Vitakauskas 2007). In his seminal work in the context of the Optimum Currency Areas that is A Theory of Optimum Currency Areas (1961), Mundell discernibly appears to adhere to a Keynesian mindset. According to Mundell, in order to mitigate the shocks occurring in the private sector, whether originating from the supply side or demand side, the countries could resort to the manipulation of national fiscal and monetary policies (1961). This nascent theory of Mundell was essentially based on stationary expectations pertaining to exchange rates, price levels and interest rates. The earlier Mundell was conclusively all for the Keynesian fine tuning of national fiscal and monetary policies, shielded by a floating exchange rate (1961). Mundell held that the diversified econ ...Download file to see next pagesRead More
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