ABSTRACT
Countries view the establishment of an independent currency as an important element of national sovereignty. The Keynesian traditions in which the optimal currency area arguments were developed allowed for a setting with highly elastic goods supply and internationally price-elastic demand for goods. In this chapter, the author argues that the supply elasticities required for the exchange rate to be an effective stabilization tool simply may not be present during early stages of economic transition. The broad historic appeal of the traditional optimal currency area arguments has led scholars to apply the reference criteria to recent debates over developed and transition economy exchange rate regime choice. The traditional optimal currency area approach draws its insights largely from an economic environment in which there exist short-run price stickiness and employment adjustment to shocks, accompanied by a longer run inflation-employment tradeoff. If combined with a comprehensive reform package, the independent currency can improve the country's situation.
