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Playing Monopoly with the DevilDollarization and Domestic Currencies in Developing Countries$
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Manuel Hinds

Print publication date: 2006

Print ISBN-13: 9780300113303

Published to Yale Scholarship Online: October 2013

DOI: 10.12987/yale/9780300113303.001.0001

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The Conventional Optimal Currency Area Theory

The Conventional Optimal Currency Area Theory

(p.197) Chapter 11 The Conventional Optimal Currency Area Theory
Playing Monopoly with the Devil

Manuel Hinds

Yale University Press

This chapter analyzes the main faults of the conventional optimal currency area theory, of which, it argues, there are at least four. First, it focuses on the optimality of the features of geographical regions, not on the services which a currency should provide in such regions to turn them into optimal ones, and does so because it assumes that the optimality is given by the possibility of manipulating the currency and not by the quality of the currency itself. Second, the chapter assumes that local currencies will react to manipulations in ways which are unrealistic in developing countries. Third, it focuses on trade, ignoring the financial dimensions of the choice of currency. For this reason, the chapter's application results in grave conflicts between the financial and trade aspects of the choice of currency. Fourth, the theory ignores the preferences of the populations and is therefore being overtaken by spontaneous dollarization.

Keywords:   conventional optimal currency, optimality, local currencies, developing countries, dollarization

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