Euro zone debt crisis: theory of optimal currency area

Georgieva Svrtinov, Vesna and Boskovska, Diana and Lozanoska, Aleksandra and Gorgieva-Trajkovska, Olivera (2015) Euro zone debt crisis: theory of optimal currency area. Economic Development, Journal of the Institute of Economics - Skopje, 3. pp. 121-136. ISSN 1857-7741

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Creation of a monetary union, carries along certain costs and benefits. Benefits of monetary union mainly stem from reducing transaction costs and eliminating exchange-rate uncertainty. On the other side, a country that joins a currency union, therefore gives up the opportunity to select a monetary policy, that it regards as optimal for its own circumstances. In this paper we explain the criteria of optimum currency area (OCA): degree of trade, similarity of business cycles, degree of labor and capital mobility and system of risk sharing. Viewed through the prism of these criteria, EMU is currently far from being an optimal currency area, especially in fulfillment criteria of labor mobility and fiscal integration. The aim of the paper is to highlight certain shortcomings of the EMU, such as its vulnerability to asymmetric shocks and its inability to act as predicted by the theory of optimum currency areas. Furthermore, we explain the reasons behind the difficulties that the euro area faced, and the problems that led to the outbreak of the sovereign debt crisis. At the end, we laid out several steps that could be taken or conditions that could be met in the euro zone in order to move toward optimization. Key words: euro zone, debt crisis, optimal currency area, business cycles, convergence criteria. JEL classification: F15, F21, F23, F31, F36, F44, F45

Item Type: Article
Subjects: Social Sciences > Economics and business
Divisions: Faculty of Economics
Depositing User: Olivera Trajkovska
Date Deposited: 13 May 2016 11:51
Last Modified: 13 May 2016 11:51

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