Optimum currency areas and Euro-zone

Background
“Optimum currency areas” theory was found in 1960s, and http://www.ukthesis.org/dissertation_writing/Accounting/  was found based on the heated debate of fixed exchange rate system and float exchange rate system. This theory has found for more than forty years, and widely attention by public, it also was improved and perfected in the theory and practice, the Euro-zone was found in 1999, this is a classic practice of “Optimum currency areas” theory, now the Euro-zone has been developed for more than ten years, it has some advantage and disadvantage, particularly for the Europe debts crisis, it presents the disadvantage, actually the Euro-zone was debate since it was found, and many experts discuss the “Optimum currency areas” theory and Euro-zone, although the Euro-zone was found based on the “Optimum currency areas” theory, but it not the perfect currency areas, because it bot makes the balance of inside and external balance for every member, as the strength of similar trend of members of Euro-zone, the Euro-zone will become a optimum currency areas, this paper will mainly research the “Optimum currency areas” theory and Euro-zone, it will interest for build the “Optimum currency areas”.

“Optimum currency areas” theory
“Optimum currency areas” theory was found in 1960s, and was firstly proposed by Robert, A. Mundell, then many experts became research this theory, it has three stages for the development of this theory, early optimum currency areas, middle stage optimum currency areas and modern optimum currency areas.

In the early stage of optimum currency areas, it mainly proposed some standard of optimum currency areas, Robert A. Mundell thought the mobility of production factors, he thought the mainly reasons of imbalance of international payments is demand shift, when the demand for production of A country shift to the B country, it will imbalance international payments, and make the unemployment and inflation of A country, if A and B countries want to elimination the imbalance, the fixed and float exchange rate both cannot solve it, while the currency areas can solve it, the demand shift thought the mobility of production factors, when the area has barrier to the external of areas, the area of mobility production factors can format a currency area, in the currency area, it has fixed exchange rate between members, while for the external currency area, it will have float exchange rate, so the mobility production factors ca become a standard of currency area. R. I, Mckinnon proposed openness as the standard for the currency area, the more closer of trade relation, it should build currency area, and carry out fixed exchange rate, while the outside of currency area it carries out float exchange rate. P. B. Kenen proposed the production diversification as the standard of currency area. The more diversification of production, it exist cross-cutting foreign demand for different productions, and eliminate the effect of total change, so these countries suit to carry out fixed exchange rate. J. C. Ingram proposed the finance integration as the standard of currency areas, when the area has finance integrate, the imbalance international payments may make the change of interest, and lead to scale of capital flow, make the balance of international payments, involve the change of exchange rate. G. Harberler and J. M. Fleming proposed the inflation as the standard, Milton Friedman and Kawai proposed flexibility of between price and wage. In the middle stage, experts become concern the profit and cost of join the currency area, the present is H.Grubel, W.Cordon, Y.Ishiyama, Edward Tower, Thomas Willett, it analysis the profit and cost when join the currency area, the profit includes involes the uncertain of violate of exchange rate, decrease trade cost, decrease the cost of foreign exchange reserves, reduce the flow of speculative capital, benefit to improve the transparency and efficiency of resource allocation, contribute to capital mobility of currency area and so on, while the cost of join currency area includes loss the autonomy of monetary policy and exchange rate policy, fiscal policy of members also are subject to common monetary policy. And switching cost, form the profit and cost when join the currency area, and the country can decide whether join the currency area, and forma the optimum currency area. As the development of macroeconomics and the found of Euro-zone, some experts began to apply the quality model to analysis optimum currency area, it has optimum currency area in the rational expectation and endogenous of optimum currency area theory. In the rational expectation, it will has more profit when country join the currency area, the cost will become smaller. Rational Expectations Theory of Optimum Currency Areas Under the rational expectations theory of optimal currency area in early to replace the fixed expectations, rational expectations that the effects of monetary policy significantly decreased; a number of economies, through the formation of alliances or goods associated with a strong local currency will be currency peg will help improve the credibility of monetary policy, thereby enhancing the effectiveness of monetary policy. Under the rational expectations theory of optimal currency area that formed the cost of monetary union will be smaller, while the proceeds will be greater. Endogenous optimal currency area theory points out that: The early theory of optimum currency areas required by a number of "harsh" standard, monetary union can be formed, "post" gradually be met. Not difficult to see, in a sense, both under rational expectations theory of optimal currency area, or the endogenous optimal currency area theory, lower threshold of composed monetary union.#p#分页标题#e#

The so-called best currency area, is among a number of commodities, labor, capital flows, more flexible, economic openness and financial integration in the high level of economic development and inflation close to coordinate economic policy more easily formed by the countries and regions currency areas, such currency area through the coordination of monetary policy, fiscal policy and foreign exchange rate flexibility within the region to achieve full employment, price stability and balance of payments target.

The Euro-zone was found in 1999, the basic theory was “Optimum currency areas” , it was the practice of  “Optimum currency areas”. The member of Euro-zone was mainly in Europe, the location of members are similar, and international trade are closely, the deep of economic integration is high, and the culture, economy, policy, finance, social are similar, these factors lead to the format of Euro-zone,, it form economy cooperate to currency cooperate, it suitable to the standard of optimum currency area, the diversification production, inflation similar, it has union of exchange rate, interest, capital flow, the openness between members are closely, and finance, so it make the cost very few when join into the Euro-zone. Actually it not only the practice of  “Optimum currency areas”, it also motion the development of  “Optimum currency areas” ,theory, the Euro-zone provide the research case for theory, the “optimum currency areas” theory provide the theory for the Euro-zone, they mutual promotion and mutual development.
 

Euro-zone cope the economic changes

In the Bretton-Woods era, the floating exchange rate acted as “automatics stabilisers” for countries subjected to economic changes. Actually in the Bretton-Woods era, make the US dollar link to the gold,, the exchange rate of members link to the US dollar, this is the adjust fixed exchange rate system. The mechanism as follow: when the economic of a country is stable in a long time, while one day, when the economic began decrease, particularly the trade between this country an US, this leads to the imbalance international payments, so in order to balance the international payment, the exchange rate of this country will decrease, the exchange rate of US dollar will increase, the decrease of exchange rate will make the import increase, then the economic become growth, so the exchange rate will automatics stability for economic change.

For Euro-zone, How Euro-zone members coped this facility? Euro-zone make the member give up issue currency, and use union currency, and the the centre banks of Europe carry out the common monetary policy, and accept the constraints of common fiscal discipline. When the economy of a member change, such as the import of a country decrease, particularly the import of outside Euro-zone, it make the economy of country decrease, the international payment will imbalance, so in order to balance the international payment, the exchange rate will decrease, due to the country use the common currency-Euro, so it make the Euro decrease. But for other members, it may not agree to decrease the Euro, so it must coordinate these members. Particularly when the trade between members, A country import production to B, for A country, the international payment may surplus, while for the B country will lose, so it must have debt from other countries, while it carries out the fixed exchange rate in the Euro-zone, so the exchange rate will not automatics stability for economic change. So in order to balance the international payment, some members require some members decrease the government budget, and control government expenditure. the Germany and Netherlands propose “economic advance”, they think the economic integrate advance currency advance, they require some members control government expenditure, decrease the debts from others countries. The Germany disagree the carry out fixed exchange rate advance, while the France require the permanent fixed exchange rate, actually all these options are based on the benefit of every members. In order to coped the exchange rate automatics stability for economic change, it must strength the currency union and common monetary policy, and strictly control government expenditure, strength the international trade between members and between outside of Euro-zone, stable the exchange rate of Euro, and make the Euro exchange rate automatics stable for the economic of Europe change. That is to say we noe need exchange rate of every member automatics stable for economic of very member change, we can make Euro-zone economics integrate, and make the Euro automatics stable for economic change. From the current Europe debt crisis, we find the finance regulate integrate is also important,#p#分页标题#e#

Actually the Euro-zone has been development for more than ten years, it also has some disadvantage, it very difficult to make common monetary policy, it may difficult to coordinate the benefit of every member, and the economic of every member different, some members are develop very stale, such as Germany, so it may exist different economic objects, some countries may make price stable, some countries increase the employments, some countries make balance of international payments, so it should coordinate the benefit of every member. So we must development the advantage of Euro-zone system, eliminate the disadvantage , only in this way Euro-zone can have healthy development.

Conclusions
This paper mainly research the “optimum currency areas” and Euro-zone, we describe the “optimum currency areas”, particularly the development of this theory, this theory has three stage development, now it is very perfect, then research the Euro-zone, introduce the Euro-zone, and the relationship of Euro-zone to “optimum currency areas” theory, the Euro-zone was found based on this theory, and it is a practice of “optimum currency areas”. For the Euro-zone members coped the exchange rate automatics stable for economic change, it must coordinate the benefit of every members, options of some members may difference form others members due to the maintenance the benefit themselves. We must strength the international trade , finance integrate, finance regulate, maintain the benefit of Euro-zone, make the Euro exchange rate automatics stable for economics of uro-zone, only in this, Euro-zone can have health development.

References
C.Bean. “Economic and Monetary Union in Europe “ Journal of Economic Perspectives 6. (1992 )

Friedman• M. The role of monetary policy[J].American Economic Review,1968.

J•A•Frankel and A•K•Rose. The Endogeneity of the Optimum Currency Area Criteria[J]. The Economic Journal,1996

J•A•Frankel,and A.K.Rose. Is EMU more http://www.ukthesis.org/dissertation_writing/Accounting/  Justifiable Ex Post than Exante?[J].European Economic Review 41,1997.

Mundell• R• A. Theory of Optimum Currency Areas[J].American Economic Review，1961.

McKinnon•R•L. Optimum Currency Areas[J].American Economic Review,1963.

M. Feldstein. “ The Political Economy of the European Economic and monetary Union” Journal of Economic perspectives, 11 (1997).