Economics, 3rd Edition

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FIGURE 36.2

SELF TEST 

List and discuss the key costs and benefits of joining a currency union.

optimum currency area 

a group of countries for which it is optimal to adopt a common currency and form a 

currency union

THE THEORY OF OPTIMUM CURRENCY AREAS

Optimum currency area

 (OCA) theory attempts to set down a set of criteria for a group of countries such 

that, if the criteria were satisfied, then it would in some sense be ‘optimal’ for the countries to adopt a 

common currency. The qualifier ‘optimal’ here refers to the ability of each of the countries to limit the costs 

of monetary union and enhance the benefits. It is generally used loosely, since there is no way for certain 

of ensuring whether it is indeed optimal for a group of countries to form a currency union and, more often 

than not, countries will fulfil some but not all of the OCA criteria.