Advertisement

A Survey of Currency Area Theory

  • John R. Presley
  • Geoffrey E. J. Dennis

Abstract

Economic theory unfortunately does not fit into very easily defined compartments. It would be convenient to argue that the only relevant part of theory, as far as monetary integration in Europe is concerned, is that which has been labelled ‘optimal currency area’ theory; but this is not true. One only needs to examine the possible stages in the movement towards a common currency in Western Europe to appreciate that theory alone cannot provide all the answers. A common currency cannot be introduced instantaneously. Monetary integration may exhibit a number of possible stages; there may be a move initially towards a fixed exchange rate system, and this might be accompanied by various degrees of centralisation in the decision making process. Whether or not monetary and fiscal policies show total, partial, or no supranational control in a currency area will determine the effectiveness of integration and the ability of the participants to achieve economic objectives; for this reason it is worthwhile in this chapter to go outside the theory of optimal currency areas to examine the operation of so called policy-mixes under a fixed exchange rate regime.

Keywords

Exchange Rate Fiscal Policy Currency Area Flexible Exchange Rate Optimal Currency Area 
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.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

Notes

  1. 1.
    J. E. Meade, ‘The Balance of Payments problems of EFTA’, Economic Journal vol. 67 (Sep 1957) pp. 376–96 and Economic Theory and Western European Integration, T. Scitovsky, London Union, 1958.Google Scholar
  2. 2.
    R. A. Mundell, ‘A Theory of Optimal Currency Areas’, American Economic Review (Sep 1961) pp. 657–65.Google Scholar
  3. 3.
    R. I. McKinnon, ‘Optimal Currency Areas’, American Economic Review (Sep 1963) pp. 717–24.Google Scholar
  4. 4.
    P. B. Kenen, ‘The Theory of Optimal Currency Areas: an eclectic view’, in Monetary Problems of the International Economy, ed. A. Swobada and R. A. Mundell (Chicago, 1969 ) pp. 41–60.Google Scholar
  5. 6.
    J. M. Fleming, ‘On Exchange Rate Unification’, Economic Journal (Sep 1971).Google Scholar
  6. 7.
    G. Magnifico, ‘European Monetary Unification for Balanced Growth: A New Approach’, Essays in International Finance, no. 88 ( Princeton, N. J., Aug 1971 ).Google Scholar
  7. 8.
    G. E. Wood, ‘European Monetary Union and the UK—A cost-benefit analysis’, Surrey Papers in Economics, no. 9 (July 1973).Google Scholar
  8. 10.
    H. G. Johnson, ‘Conditions of International Monetary Equilibrium: Equilibrium under Fixed exchange rates’, American Economic Review (May 1963).Google Scholar
  9. 14.
    For a discussion of this point see J. M. Fleming, ‘On Exchange Rate Unification’, Economic Journal (Sep 1971) pp. 472–4.Google Scholar
  10. 15.
    E. Heckscher, ‘The effects of foreign trade on the distribution of income’, Ekonomiks Tidskrift (1919), reprinted in Readings in the theory of international trade, ed. H. Ellis and A. Metzler (Philadelphia, 1949 ).Google Scholar
  11. 18.
    See, for example, F. Machlup, ‘In Search of Guides for Policy’, in Maintaining and Restoring Balance in International Payments W. Fellner et al. (Princeton, N. J., 1966).Google Scholar
  12. 20.
    W. M. Corden ‘Monetary Integration’ Essays in International France, No. 93 (Princeton, N.J., Apr 1972 ).Google Scholar
  13. 24.
    G. E. Wood, ‘European Monetary Union and the U.K. - A Cost-Benefit Analysis’, Surrey Papers in Economics no. 9 (1973).Google Scholar
  14. 26.
    R. I. McKinnon and W. Oates, ‘The Implications of International Economic Integration for Monetary, Fiscal and Exchange Rate Policy’, Studies in International Finance, no. 16 ( Princeton N. J. 1966 ).Google Scholar
  15. R. A. Mundell, ‘Capital Mobility and Stabilisation Policy under Fixed and Flexible Exchange Rates’, Canadian Journal of Economics and Science, xxix (Nov 1963).Google Scholar
  16. 30.
    See, as a starting point, R. Musgrave, The Theory of Public Finance, (McGraw-Hill, 1959 ).Google Scholar
  17. 31.
    J. Tinbergen, On the Theory of Economic Policy (Amsterdam, 1952 ).Google Scholar
  18. 32.
    The curve takes its name from A. W. Phillips, who wrote ‘The Relation between the Rate of change in Money, Wage Rates and Unemployment in the United Kingdom 1861–1957’, Economica, xxv (Nov 1958) pp. 283–99.Google Scholar
  19. 37.
    M. T. Sumner, ‘European Monetary Union and the Control of Europe’s Inflation Rate’, University of Manchester Discussion Paper (July 1974) p. 14.Google Scholar
  20. 41.
    A. G. Hines, ‘Trade Unions and Wage Inflation in the U.K. 1893–1961’, Review of Economic Studies (1964).Google Scholar
  21. 43.
    M. Friedman and D. Laidler, ‘Unemployment versus Inflation: An Evaluation of the Phillips Curve’, Institute of Economic Affairs, lecture no. 2 (June 1975).Google Scholar
  22. 44.
    J. M. Parkin, ‘An Overwhelming Case for European Monetary Union’, Banker (Sep 1972).Google Scholar

Copyright information

© John R. Presley and Geoffrey E. J. Dennis 1976

Authors and Affiliations

  • John R. Presley
  • Geoffrey E. J. Dennis

There are no affiliations available

Personalised recommendations