A Suggested Reformulation of the Theory of Optimal Currency Areas

In contrast to conventional analyses of monetary union between two particular countries or sets of countries, this paper treats the possible expansion of a given currency area as a continuous variable ranging from zero to one; zero if there is no expansion and one if all sources of imports and competition in trade are included in the union. The optimal order in which new members are admitted to the union then becomes one aspect of the problem. It is shown that by using this approach, it is easier to defend the argument that many nations are too small to form optimal currency areas. The demands upon the origin of the shocks, factor mobility, and political organization are smaller. The approach also fits better with the evidence.