Optimal currency area,
Definition of Optimal currency area:
An economics theory credited to Robert Mundell in which economic efficiency would be maximized in a geographical region if the region all shared a single currency. Also called optimal currency region (OCR).
In 1961, Canadian economist Robert Mundell published his theory of the optimal currency area (OCA) with stationary expectations. He outlined the criteria necessary for a region to qualify as an optimal currency area and benefit from a common currency. In this model, the primary concern is that asymmetric shocks may undermine the benefit of the OCA. In this theory, if large asymmetric shocks are common and the criteria for an OCA are not met, then a system of separate currencies with floating exchange rates would be more suitable in order to deal with the negative effects of such shocks within the single country experiencing them.
An optimal currency area (OCA) is the geographic area in which a single currency would create the greatest economic benefit. While traditionally each country has maintained its own separate, national currency, work by Robert Mundell in the 1960s theorized that this might not be the most efficient economic arrangement. In particular, countries that share strong economic ties may benefit from a common currency. This allows for closer integration of capital markets and facilitates trade. However, a common currency results in a loss of each country's ability to direct fiscal and monetary policy interventions to stabilize their individual economies.
How to use Optimal currency area in a sentence?
- An optimal currency area (OCA) is the geopolitical area over which a single, unified currency will provide the best balance of economies of scale to a currency and effectiveness of macroeconomic policy to promote growth and stability.
- Economist Robert Mundell first outlined criteria for an OCA, which are based on the degree of integration and similarity between economies. .
- The euro is an example of an application of an OCA, though events such as the Greek debt crisis have put this to the test.
Meaning of Optimal currency area & Optimal currency area Definition