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.
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