Do Emu Countries Constitute an Optimum Currency Area? An Empirical Test of the Generalised Purchasing Power Parity Hypothesis

This paper makes use of Generalised Purchasing Power Parity based on the Johansen cointegration technique to examine the issue of Optimum Currency Area (OCA) in five European Monetary System (EMS) countries: France, Greece, Italy, Portugal and Spain. It evaluates the degree of asymmetry in different sub-periods in terms of four (i.e. n-1) equilibria. The existence of n-1 equilibria implies the adoption of a common monetary policy. The empirical results indicate that the only period that these countries constituted an OCA was during 1991-1998. However, this result is the exception rather than the rule since estimation of a more extended period (i.e. 1986-1998) rejects the hypothesis of an OCA.