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Endogeneities of Optimum Currency Areas: What brings Countries Sharing a Single Currency Closer together?

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Abstract

This paper brings together several strands of the literature on the endogenous effects of monetary integration: i.e., whether sharing a single currency may set in motion forces bringing countries closer together. The start of the European Economic and Monetary Union (EMU) has spurred a new interest in this debate. There are four areas that we analyse in this context: the endogeneity of economic integration, in which we look primarily at evidence on prices and trade; the endogeneity of financial integration or equivalently insurance schemes that can be provided by capital markets; the endogeneity of symmetry of shocks and (similarly) at synchronisation of outputs; and the endogeneity of product and labour market flexibility. The paper presents a conceptual framework within which to illustrate such endogeneities. We present diverse arguments and, where possible, explore the incipient empirical literature focussing on the euro area. On the whole, concerning EMU, our preliminary conclusion is one of moderate optimism. The different endogeneities that exist in the dynamics towards optimum currency areas are at work. How strong these endogeneities are and how quickly they do their work remains to be seen.

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