Abstract

The theory OF optimum currency areas (OCA) pioneered by Robert Mundell in 1961 has become fashionable again. European economic and monetary union (EMU) is surely the main cause of the new wave of OCA literature in recent years. One basic idea that seems to be widely accepted is that a smaller European Union member country should have a stronger interest in participating in EMU because it is more open. This presumption is based on two elements: that the larger the degree of openness, the higher the gain from EMU from reduced transaction costs; and that the larger the degree of openness, the lower the cost of abandoning the nominal exchange rate as an economic policy instrument. We do not address the first element; our paper concentrates exclusively on factors that determine the costs and show that the widely accepted presumption that they diminish with openness is wrong.