Optimum Currency Areas

Title Page

Optimum Currency Areas

New Analytical and Policy Developments


Mario I. Blejer, Jacob A. Frenkel, Leonardo Leiderman, and Assaf Razin, in cooperation with David M. Cheney

International Monetary Fund 1997


© 1997 International Monetary Fund

Cover design by Massoud Etemadi and interior design by Julio Prego IMF Graphics Section

Library of Congress Cataloging-in-Publication Data

Optimum currency areas: new analytical and policy developments / editors, Mario I. Blejer, Jacob A. Frenkel, Leonardo Leiderman, and Assaf Razin; in cooperation with David M. Cheney.

p. cm.

Includes bibliographical references (p.).

ISBN 1-55775-652-X (pbk.)

1. Monetary unions. 2. Monetary policy. I. Frenkel, Jacob A.

II. Leiderman, Leonardo, 1951-. III. Razin, Assaf. IV. Cheney, David M. V. Title.

HG3894.B58 1997




Price: US$15.00

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  • Preface

  • Acknowledgments

  • 1. Introduction

    • Mario I. Blejer, Leonardo Leiderman, and Assaf Razin

  • 2. Contributions of Robert A. Mundell

    • A Theory of Optimum Currency Areas (1961)

    • Updating the Agenda for Monetary Union

  • 3. Policy Forum: Fixed Versus Floating Exchange Rates: What’s New in the Debate?

    • William R. White

    • Jacob A. Frenkel

    • Richard Portes

    • Manuel Guitián

    • Assaf Razin

  • 4. New Developments

    • The Endogeneity of the Optimum Currency Area Criteria

      • Jeffrey A. Frankel and Andrew K. Rose

    • Openness and the Cost of Fixing Exchange Rates in a Mundell-Fleming World,

      • Daniel Gros and Alfred Steinherr

    • Exchange Market Pressure and Exchange Rate Management: Perspectives from the Theory of Optimum Currency Areas,

      • Tamim Bayoumi and Barry Eichengreen

    • EMU: Ins, Outs, and the Macroeconomic Effects of Alternative Monetary Policy Rules,

      • Thomas Krueger, Douglas Laxton, and Assaf Razin

    • The Credibility Problem, EMU, and Swedish Monetary Policy,

      • Alex Cukierman

    • Two Concepts of Money, and the Future of Europe,

      • C.A.E. Goodhart

    • Debt-Creating Versus Nondebt-Creating Fiscal Stabilization Policies: Ricardian Equivalence, Fiscal Stabilization, and EMU,

      • Tamim Bayoumi and Paul R. Masson

    • Monetary Union Without Fiscal Coordination May Discipline Policy Makers,

      • Roel M. W. J. Beetsma and A. Lans Bovenberg

    • International Risk Sharing and European Monetary Unification,

      • Bent E. Sørenson and Oved Yosha

    • Out in the Sunshine? Outsiders, Insiders, and the United States in 1998,

      • Fabio Ghironi and Francesco Giavazzi

  • Participants


The ongoing process of economic integration in Europe—with monetary integration and the creation of a single European currency critical elements of the process—has renewed interest in the concept of an optimum currency area. In recent years, many economists have written in search of an appropriate analytical framework to permit the evaluation of the requirements for, and consequences of, monetary integration. And, as is often the case, they begin with the concept of an optimum currency area pioneered by Robert A. Mundell in 1961.

This volume is the result of a December 1996 symposium on optimum currency areas, held in Tel Aviv and sponsored by the Bank of Israel, the IMF, and Tel Aviv and Hebrew Universities. The symposium, and this book, honor Robert Mundell and his seminal contribution to this and many other important topics. They do that in part by providing an opportunity for him to reflect on and update his thinking on the subject, and by asking other distinguished experts to present their views on the theoretical and policy-oriented implications of Mundell’s original contribution—and its relevance for European economic and monetary union (EMU).

The run-up to the launching of EMU on January 1, 1999, is indeed a heady period, given the scope and magnitude of the project. The IMF recently hosted a conference on EMU and its implications for the IMF and for the international monetary system, which considered the issues of timing, the euro’s strength as a currency, the impact on the stability of exchange rates, and how the IMF should adapt.

This timely book sheds light on many of the relevant issues. It offers thoughts and concepts that extend and clarify the analytical framework for assessing the implications and consequences of EMU, which is clearly the most important outstanding issue for the international monetary system.

It is entirely appropriate for the IMF to salute, on his sixty-fifth birthday, Bob Mundell, whose work—some of it done at the IMF—guides so many of us in our thinking about exchange rates and the international economy. To Bob we say, well done and thank you for all you have contributed.

Stanley Fischer

First Deputy Managing Director

International Monetary Fund


The discussions held in Tel Aviv during the December 4–6, 1996, conference, “Optimum Currency Areas: The Current Agenda for International Monetary and Fiscal Integration,” commemorated the thirty-fifth anniversary of Robert Mundell’s seminal article on optimum currency areas. They also sought to shed light on the relevance of OCA theory for the impending European economic and monetary union.

We would like to extend our appreciation to Robert Mundell for his updating of the agenda for monetary union provided in Tel Aviv and to all participants in the conference. We are especially grateful to the joint sponsors of the conference: the Bank of Israel, the International Monetary Fund, The Pinhas Sapir Center for Development and The Rubinstein Foundation at Tel Aviv University, and The Helmut Kohl Institute for European Studies at the Hebrew University of Jerusalem. Thanks are also owed to Nava Ganor, for her organizational support, and to Lijun Li for wordprocessing.

Mario I. Blejer

Jacob A. Frenkel

Leonardo Leiderman

Assaf Razin

David M. Cheney