What are the main advantages and disadvantages of an optimum currency area?

The advantages of a common currency are obvious, if hard to quantify: reduced transaction costs, elimination of currency risk, greater transparency and possibly greater competition because prices are easier to compare. (Krugman, 2012) The disadvantages of a single currency come from loss of flexibility.

What are reasons to create an optimal currency area?

According to Mundell, there are four main criteria for an OCA:

• High labor mobility throughout the area.
• Capital mobility and price and wage flexibility.
• A currency risk-sharing or fiscal mechanism to share risk across countries in the OCA.
• Similar business cycles.

What is the theory of optimum currency areas?

Optimum currency area theory (OCA) states that specific areas not bounded by national borders would benefit from a common currency. In other words, geographic regions may be better off using the same currency instead of each country within that geographic region using its own currency.

Is USA an optimum currency area?

Some economists have argued that the United States, for example, has some regions that do not fit into an optimal currency area with the rest of the country. The theory of the optimal currency area was pioneered in the 1960s by economist Robert Mundell.

What are the benefits of an optimum currency area?

Secondly, the optimum currency area promotes specialisation in production and expanded flow of trade and investments among the member countries. Thirdly, the whole region or area having a common currency or fixed exchange rate is treated as a single large market.

What are the advantages and disadvantages of a single currency?

A survey in the past found that a unit of currency say 1 French Franc would lose 40% of its value after if it is exchanged into each of the 12 national currencies then used in the European Community (before the formation of EU). This also encourage trade across borders in this single currency area.

Is it better to use the same currency in all regions?

In other words, geographic regions may be better off using the same currency instead of each country within that geographic region using its own currency. Optimum currency area (OCA) theory states that regions that are not bounded by national borders and share certain traits should share a common currency.

What is the optimum currency area ( OCA ) theory?

Optimum currency area theory (OCA) states that specific areas not bounded by national borders would benefit from a common currency. In other words, geographic regions may be better off using the same currency instead of each country within that geographic region using its own currency.