Question

In order to ensure the existence of an optimum currency area (OCA) to be effective, numbers of criteria should be taken into account. Discuss

Answer 1

Optimum currency area also known as an optimal currency region in which it would maximize economic efficiency to have the entire region share a single currency.

It's criteria are-

1) labor mobility across the region- this includes physical ability to travel,lack of culture barrier to free movement and institutional arrangements.

2) openness with capital mobility and price and wages flexibility across the region- This is so that the market forces of supply and demand automatically distribute money and goods to where they are needed.

3) A risk sharing system such as an automatic fiscal transfer mechanism to redistribute money to areas which have been adversely affected by first two characteristics.

4) participants countries have similar business cycle when one countries experience a boom or recession,other countries in the union are likely to follow.