Adjustment Costs, Optimal Currency Areas, and International Reserves

  • Mordechai E. Kreinin
  • H. Robert Heller


When a country faces a disequilibrium in its Balance of Payments, it must make several choices. Paramount among them are (a) the choice (or the optimal balance) between adjustment to the disturbance and financing of the disequilibrium by the use of international monetary reserves, and (b) the choice of the optimal adjustment technique. Several factors relating to the internal as well as external position of the country have an important bearing on these decisions. This paper is concerned with the economic costs of adjustment on the assumption that the rational policy-maker would select the course of action that minimises these costs. With this in mind, the second choice listed above has implications for the optimum currency area problem, for it provides a criterion for the least cost policy to rectify external imbalances. The next two sections develop criteria for measuring the cost of adjustment and apply them to the determination of optimum currency areas. Some rough empirical estimates are also provided, with data pertaining to the 1960s. The final section is devoted to the choice between adjustment and financing, and its implications for optimal international reserves.


Trade Cost Adjustment Cost Demand Elasticity Currency Area International Reserve 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. [1]
    Denison, Edward. Why Growth Rates Differ, Washington, D.C.: The Brookings Institution, 1967.Google Scholar
  2. [2]
    Heller, H. Robert. ‘Optimal International Reserves’, The Economic Journal, lxxvi, (June 1966), 296–311.CrossRefGoogle Scholar
  3. [3]
    Houthakker, H. S. and Magee, S. P. ‘Income and Price Elasticities in World Trade’, The Review of Economics and Statistics, li (May 1969), 111–25.CrossRefGoogle Scholar
  4. [4]
    Kenen, Peter B. ‘The Theory of Optimum Currency Areas: An Eclectic View’, in Mundell and Swoboda (eds.), Monetary Problems of the International Economy. Chicago: The University of Chicago Press, 1969, 41–60.Google Scholar
  5. [5]
    Mckinnon, Ronald I. ‘Optimum Currency Areas’, American Economic Review, liii (September 1963), 717–25.Google Scholar
  6. [6]
    Mundell, Robert A. ‘A Theory of Optimum Currency Areas’, American Economic Review, li (September 1961), 657–65.Google Scholar
  7. [7]
    Salant, Walter et al. The United States Balance of Payments in 1968, Washington, D.C.: The Brookings Institution, 1963.Google Scholar
  8. [8]
    Yeager, Leland B. International Monetary Relations, New York: Harper and Row, 1966.Google Scholar

Copyright information

© Mordechai E. Kreinin and H. Robert Heller 1973

Authors and Affiliations

  • Mordechai E. Kreinin
  • H. Robert Heller
    • 1
  1. 1.Michigan State University and the University of HawaiiUSA

Personalised recommendations