Question

Based on the theory of Optimum Currency Area (OCA), evaluate whether in today’s economic background it is suitable for countries in East and Southeast Asia to use a single currency. In your essay, please give an assessment, and examples if necessary, on w hether this geographical region can satisfy the criteria of an OCA.

Answer 1

There are four criteria for an area to be formed as an optimum currency area -

1. Increased labor mobility throughout the area - The East and South east Asia region satisfies this criteria of Optimum Currency Area as there is labor mobility throughout the area.

2. Capital mobility and price and wage flexibility - There also exists increased capital mobility among the nations and wage price flexibility exists among nations.

3. A currency risk sharing system among nations - Once the region is an Optimum currency area then distribution of money to region experiencing economic difficulties become necessary.

4. Similar business cycles- This is one of the criteria in which the countries of east and South east Asia do not satisfy. They are not always operating on the same business cycle.

Thus, currently it is not desirable for the countries to form an optimum Currency Area.