Optimal Currency Area

AAA

DEFINITION of 'Optimal Currency Area'

The geographic area in which a single currency would create the greatest economic benefit. While traditionally each country has maintained its own separate currency, work by Robert Mundell in the 1960s theorizes that this may not be the most efficient economic arrangement. In particular, countries which share strong economic ties may benefit from a common currency. This allows for closer integration of capital markets and facilitates trade. However, a common currency results in a loss of each country's ability to direct fiscal and monetary policy interventions to stabilize their economies.

INVESTOPEDIA EXPLAINS 'Optimal Currency Area'

The primary test for the theory of optimal currency areas is the introduction of the euro as a common currency in many European nations. Eurozone countries matched well with Mundell's criteria for successful monetary union, providing the impetus for the introduction of a common currency. While the eurozone has seen many benefits from the introduction of the euro, it has also experienced problems such as the Greek debt crisis. Thus, the long-term outcome of monetary union under the theory of optimal currency areas remains a subject of debate.

RELATED TERMS
  1. Robert A. Mundell

    The winner of the 1999 Nobel Prize in Economics for his research ...
  2. Currency Band

    A currency system that establishes a trading range that a currency's ...
  3. Currency

    A generally accepted form of money, including coins and paper ...
  4. Quote Currency

    The second currency quoted in a currency pair in forex. In a ...
  5. Currency Pair

    The quotation and pricing structure of the currencies traded ...
  6. European Union - EU

    A group of European countries that participates in the world ...
Related Articles
  1. The Currency Board: Understanding The ...
    Personal Finance

    The Currency Board: Understanding The ...

  2. Top 7 Questions About Currency Trading ...
    Forex Education

    Top 7 Questions About Currency Trading ...

  3. Dollarization Explained
    Forex Education

    Dollarization Explained

  4. What Are Central Banks?
    Personal Finance

    What Are Central Banks?

comments powered by Disqus
Hot Definitions
  1. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  2. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  3. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  4. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  5. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
  6. Limit-On-Open Order - LOO

    A type of limit order to buy or sell shares at the market open if the market price meets the limit condition. This type of ...
Trading Center