Toward a Redefinition of an Optimal Currency Area
Toward a Redefinition of an Optimal Currency Area
This chapter proposes a different set of criteria to define an optimal currency area, based not on the features of economic regions but on the services that the currency should provide to be considered optimal. It suggests that a truly optimal currency area is defined not by the commonality of problems across geographic regions but by the quality of the currency serving it. Such quality depends on its ability to keep inflation rates low and its acceptance across a large and diversified economy, thus maximizing the possibilities of substitution in production and consumption within the area itself. Financially, the currency must provide access to deep and broad financial services and credit. Three or four such areas already exist—the dollar, the euro, the yen, and the pound sterling. Adopting one of them is the only practical possibility that developing countries have to access an optimal currency area.
Keywords: economic regions, currency area, inflation rates, diversified economy, developing countries
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