ABSTRACT
The economic literature on the advisability of various compositions of currency areas dates back to the 1960s, when Mundell (1961) initiated the literature on optimum currency areas (OCAs). This chapter analyses the economic efficiency and stabilization properties of variously sized currency areas. The OCA theory aims at analyzing properties of currency areas, not at predicting the composition of currency areas. The recent debate on currency area composition has to a large extent been pursued in relation to the European Monetary Union (EMU). The economic literature on EMU has mainly been concerned with the economics of monetary unions—that is, with whether EMU would constitute an OCA. Monetary unification is likely to have profound economic implications, the most important of which may fit within the framework of OCA theory. The stabilization costs in OCA theory are based on implicit Keynesian assumptions of slow macroeconomic adjustment to real shocks due to rigid nominal prices or wages.
