The endogeneity of optimum currency area criteria – lessons from history for European monetary union

Purpose – Assesses whether the current pattern of relative wage rigidity and labour inertia in Europe is a problematic factor in the successful functioning of the European monetary union as viewed by many observers given the absence of interregional fiscal transfer payments. Design/methodology/approach – Uses econometric methods to test whether the onset of monetary integration in the US and the gold standard in selected countries has increased the pro-cyclical behaviour of real wages. Findings – Finds suggestive empirical evidence that indeed a Lucas Critique argument applies such that credibly fixed exchange rate regimes might induce wages to carry the burden of macroeconomic adjustment in lieu of independent monetary policy and/or fiscal transfers. Originality/value – Makes a novel contribution to the literature by attempting to test for the existence of endogenous adjustment mechanisms based on historical monetary unions analogous to EMU.