An optimal currency area is often larger than a country. Europe do not each form an optimal currency area, but that Europe as a whole does. The creation of the euro is often cited because it provides the most modern and largest-scale case study of an attempt to identify an optimum currency area, and provides a comparative before-and-after model by which to test the principles of the theory. Feenstra and taylor international economics download pdf theory, an optimal currency area could also be smaller than a country.
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. Labor mobility across the region. What if we suppose instead that Home and Foreign have an integrated labor market, so that labor is free to move between them: What effect will this have on the decision to form an optimum currency area? For example, suppose Home and Foreign initially have equal output and unemployment. Suppose further that a negative shock hits Home, but not Foreign. If output falls and unemployment rises in Home, then labor will start to migrate to Foreign, where unemployment is lower.
Is Euro Area an Optimal Currency Area and What Barriers Could Obstruct Its Future Development? In the end, asymmetric shocks are not considered to undermine the common currency because of the existence of the common currency. And assuming they have adequate information — shocks will be more rapidly transmitted within the OCA and will be felt more symmetrically. Countries regard all of the conditions as given, such levels of labour mobility and labor market integration remain a distant prospect. For most parts of the Eurozone, then optimal monetary policy may diverge and union participants may be made worse off under a joint central bank.
If this migration can occur with ease, the impact of the negative shock on Home will be less painful. Furthermore, there will be less need for Home to implement an independent monetary policy response for stabilization purposes. With an excess supply of labor in one region, adjustment can occur through migration. In practice this does not work perfectly as there is no true wage flexibility. 5 to 15 percent in the euro-zone when compared to trade between non-euro countries.