Abstract

Everyone studying European economic and monetary union (EMU) cites the theory of optimum currency areas (OCA): whether a country should join the currency union depends on such parameters as the extent of trade with other European Union members and the correlation of the country’s income with that of other members. Few economists have focused on one of the most interesting aspects of this issue: that trade patterns and income correlations are endogenous. A country could fail the OCA criteria for membership today, and yet, if it goes ahead and joins anyway, could, as the result of joining, satisfy the OCA criteria in the future.