THE OPTIMUM CURRENCY AREA APPROACH TO EXCHANGE RATE POLICY AND INTERNATIONAL MONETARY COOPERATION

 

Arguments about the merits of fixed versus flexible exchange rates are one of the longest standing debates among economists. The key insight of the OCA approach is that there are costs and benefits for all exchange rate regimes and that these will vary from country to country. Thus no one exchange rate regime is best for all countries. OCA analysis investigates the major factors that influence the ratios of these costs and benefits. Thus for example ceteris paribus flexible exchange rates are better for large economies like the United States while fixed rates are better for small open economies like Estonia and Hong Kong.

This approach was originally thought to be relevant only for the choice of fixed versus flexible rates but OCA analysis suggests that a majority of countries do not meet the requirements for either a free float or a hard fixed rate to be optimal.

Thus most countries adopt regimes somewhere in between. Our analysis has shown that the OCA criteria are highly relevant for the choice of the forms of intermediate regimes and how they should be operated as well as for considering the economic cost and benefits of different degrees of monetary and exchange rate policy and monetary policy cooperation among different sets of countries.

Applying the OCA approach to such issues has been one of our major areas of research and besides many published studies has led to dissertations focusing on issues in Africa, Asia, Europe, Latin America, and the Middle East. 

SELECTED PUBLICATIONS 

Angkinand, P. and Chiu, E. and Willett, T.D. (2009), “Testing the Unstable Middle and Two Corners Hypotheses”, Open Economies Review (2009) 20: 61-83. 

Bird, G. and Willett, T.D. (2007), “Multilateral Surveillance: Is the IMF Shooting for the Stars?” World Economics, Vol. 8, No. 4, Oct-Dec 2007, pp 167-189. 

Bird, G. and Willett, T.D. (2008), “Why do Governments Delay Devaluation? The Political Economy of Exchange Rate Inertia”, World Economics 2008, Volume 9, Number 4, pp. 55 – 74. 

Chiu, E.M., Dechsakulthorn, S.B, Walter, S., Walton, J. and Willett, T.D. (2007), “The Discipline Effects of Fixed Exchange Rates: The Distinction between Hard and Soft Pegs“, Global Economic Review, (forthcoming). 

Chiu, E. and Willett, T.D. (2009), “The Interactions of Strengths of Governments and Alternative Exchange Rate Regimes in Avoiding Currency Crises”, International Studies Quarterly, Volume 53, No.4, December 2009, pp. 1001-1025. 

Oh, Y. and Yoon, D.R. Willett, T.D. (eds.) (2004), Monetary and Exchange Rate Arrangements in East Asia, Korea Institute for International Economic Policy.

 

Salatore, D, Dean, J. and Willett, T.D. (2003), The Dollarization Debate, Oxford University Press. 

Willett, T.D. (2001), “Truth in Advertising and the Great Dollarization Scam”, Journal of Policy Modeling 23, April2001, pp. 279-289 

Willett, T.D. (2002), “Crying for Argentina,” The Milken Institute Review, Second Quarter 2002, pp. 50-59. 

Willett, T.D. (2003), “The OCA Approach to Exchange Rate Regimes,” in Dean, J.W., Salvatore D. and Willett T.D. (Eds), The Dollarization Debate, Oxford University Press, pp. 154 – 171. 

Willett, T.D. (2003), “Fear of Floating Need Not Imply Fixed Exchange Rates”, Open Economies Review, No. 1, pp. 71 – 91. 

Willett, T.D. (2003), “Optimum Currency Area and Political Economy Approaches to Exchange rate Regimes: Towards a Framework for Integrationpublished in Current Politics and Economics in Europe, Vol. 17, No. 1, pp. 25-52. 

Willett, T.D. AND Kim, Y.(2006), “Korea's Post-crisis Exchange Rate Policy”, Korea’s Economy, Korea Economic Institute, pp. 5-15. 

Willett, T.D. (2007), “Why the Middle is Unstable: The Political Economy of Exchange Rate Regimes and Currency Crises” The World Economy, Vol. 30, Issue 5, 2007, pp. 709-891. 

Willett, T.D., Chiu, E et al. (2012), “International Aspects of Currency Policies”, Journal of Financial Economic Policy, (forthcoming). 

Willett, T.D. and Dechsakulthorn , S. (2009), “Discipline” in Reinert, K.A., Rajan, R.S., Glass, A.G. and Davis, L.S. (Eds), The Princeton Encyclopedia of the World Economy, Princeton University Press, 2009. pp. 284 – 287 

Willett, T.D., Wihlborg , C. and Zhang, N. (2009), “The Euro Debt Crisis: It isn’t just fiscal”, World Economics, Vol. 11, No.4, October-December 2010 

Willett, T.D., Hag, S.E. and Al-Barwani, K. (2010), “The GCC’s Fixed Exchange Rate: A Major Anomaly for OCA Analysis”, The World Economy Vol. 33, Issue 12, December 2010:pp. 1702-1717 

Willett, T.D., Permpoon, O. and Wihlborg, C. (2010), “Endogenous OCA Analysis and the Early Euro Experience”, The World Economy, Vol. 33, No. 7, July 2010: pp. 851-872 

Willett, T.D., Permpoon , O. and Srisorn,L. (2010), "Asian Monetary Cooperation: Perspectives from the European Experience and Optimum Currency Area Analysis, Singapore Economic Review, Volume 55, Issue:1, March 2010

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