The traditional theory of Optimum Currency Areas
Currency area is defined as the domain within which exchange rates are fixed (Mundell/1961). The benefits of a common currency are mainly microeconomic efficiency gains because of absence of transaction costs and ER risks and the costs are mainly macroeconomic loss of instrument of economic policy and adjustment mechanism. There is a difference between interregional adjustment and international adjustment even the exchange rates are fixed.
The theory of optimum currency areas is important for analyzing European monetary unification. OCA th…
