The theory of OCA was pioneered by Robert Mundell in 1961. This economic theory offers to analyse the conditions for reducing the costs and maximizing the benefits of forming or joining a monetary union. The country is said to be optimal currency area when similarities between the economic structures of countries make it feasible to adopt a single currency. There are numbers of single currency areas all around the world in the form of integrate and pegging system. European Union and Caribbean dollar are the successful example. Adopting single currency decision is always complex and often based on countries political, economical and historical roots. Adoption of Deutche Mark in 1990 by Eastern Germany (1), poor economic condition of El Salvador (2) and historical roots of Hong-Kong (pegged with US dollar) (3) respectively are the good reference for this complexity.
According to the literature, OCA theory can be laid down in two dimensions. The first dimension tries to find the economic variable to determine where the boarders of the single currency should be drawn. The second dimension believes that any single country can be an optimal member of a monetary union if they fulfil the requirements. After World War 2, when the exchange rate regime established, countries reluctant to think about both of the facet of OCA. USA than allowed its dollar to easily convertible to a fixed amount of gold to make its currency more stable. As a result, many countries noticed US dollar as a stable currency and therefore either adopted it or pegged the value of national currencies to the US dollar.
However, the concept of fixed exchange rate received a lot of attention but there were also few researchers like Friedman (1953) who stated that the only country can cope with the exogenous shock that have flexible exchange rate. Later this hypothesis used by Mundell (1961) to develop the OCA in which he stated that the creation of single currency based on the two factors mobility that is external and internal. Mundell’s OCA theory received a lot of criticism because of unrealistic and simplistic assumption for instant Philips curve which were used to develop that have been criticised in 1960-1970’s. Mc Kinnon also argued that the OCA model is full on neo- Keynesian theory.
The cases for joining the EURO-
In the essence, the argument is that why the UK should join the euro. Numerous cases have been already discussed by various economists. Djflsf is one who published the cases for and against of adopting the EURO.
To figure it out one side the five tests were designed by former British labour party chancellor, Gordon brown in 1997 for assessing the entry of Britain’s into the EMU. The membership of EMU means that the UK would adopt the EURO as its currency and UK interest rates would be set by the European central bank (ECB). This could be done by evaluating economic conditions and the interest of the British people. The five tests were-:
1. Whether there can be sustainable convergence between Britain and the economies of a single currency.
2. Whether there is sufficient flexibility to cope with economic change.
3. The effect on investment.
4. The impact on our financial services industry.
5. Whether it is good for employment.