Course Hero Logo

Case Study I and II.docx - CASE STUDY 1-Geopolitical...

This preview shows page 1 - 3 out of 9 pages.

CASE STUDY 1-Geopolitical Climate and Optimal Currency Areas (OCAs)Initiated by Mundell (1961), the optimal currency area (OCA) literature gives a set of criteria fordetermining whether nations or areas are suitable for a single currency. Criteria includingwhether or not the regions have comparable economic structures; whether or not economicshocks are comparable; the quantity of trade; the extent to which fiscal policies are linked; andthe level of labor mobility between regions. In this research, we demonstrate how regionalinflation trends within an inflationary targeting framework may be utilized to determine whetherareas within a currency union meet OCA requirements. We apply these methodologies to theCanadian provinces and show that, apart from Alberta, the provinces fit well within thenationwide inflation targeting scheme.A vast empirical literature tests OCA criterion in a variety of ways. Use of structural vs reducedform empirical modeling is a major dividing line in this research. The uniformity of economicshocks, for instance, is perhaps the most often evaluated criterion and needs structuralidentification.Using long-run limits inside structural vector autoregressive models (SVAR), Bayoumi andEichengreen (1993) explore the symmetry of economic shocks across areas and the symmetry ofthe response to these shocks. In a similar vein, Carlino and Defina (1998) investigate whetherareas respond symmetrically to a shared monetary shock, given that heterogeneity in responsesposes a difficulty for a currency union. The difficulty with these structural methods is that theyrely heavily on the validity of structural identified.Pros and Cons:Pros:Less danger of exchange rate fluctuation, reduced costs of transacting, and improved pricingcomparability are all advantages of a single currency that are easy to see, but harder to measurein terms of monetary value or economic impact. Economic gains accrue when a region separatesitself from an OCA and issues its own currency, in accordance with the Optimum Currency Area(OCA) Theory as proposed by Krugman (2012). It is possible that the formation of an idealcurrency area might have several benefits for the member countries.
An important benefit of creating an exchange rate zone is the reduction of the volatility and riskassociated with unstable exchange rates.A currency region that supports industrial specialization and economic collaboration among itsmembers is also beneficial.Third, the whole region with a shared currency or defined exchange rate is considered as asingle, vast market.To ensure that scale economies can be attained, the creation of an ideal currency union must beachievedA fifth benefit of maintaining a stable exchange rate is that it helps to keep prices stable amongthe EU member states.

Upload your study docs or become a

Course Hero member to access this document

Upload your study docs or become a

Course Hero member to access this document

End of preview. Want to read all 9 pages?

Upload your study docs or become a

Course Hero member to access this document

Term
Spring
Professor
N/A

Newly uploaded documents

Show More

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture