Optimum Currency Area Theory

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DEFINITION of 'Optimum Currency Area Theory'

A currency thoery based on geographical area that adopts a fixed exchange rate regime or a single currency within its boundaries. Optimum currency area theory can benefit a region by greatly increasing trade, but must outweighs the costs of giving up the national currency as an instrument to adjust monetary policy to be effective. An optimum currency area theory also maintains a flexible exchange rate system with the rest of the world. The theory was popularized by economist Robert Mundell in 1961.

INVESTOPEDIA EXPLAINS 'Optimum Currency Area Theory'

The creation of the euro in 1999 is often cited as a prime example of an optimum currency area theory. However, the theory was put to the test in 2010 as sovereign debt issues faced by a number of heavily indebted nations in Europe threatened the viability of the European Union and placed severe strains upon the euro.

RELATED TERMS
  1. Robert A. Mundell

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

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  3. European Currency Unit - ECU

    The European Currency Unit (ECU) was the precursor to the Euro, ...
  4. Euro

    The official currency of the European Union's (EU) member states. ...
  5. Fixed Exchange Rate

    A country's exchange rate regime under which the government or ...
  6. European Union - EU

    A group of European countries that participates in the world ...
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  1. When and why did the euro make its debut as a currency?

    On January 1, 1999, the European Union introduced its new currency, the euro. Originally, the euro was an overarching currency ... Read Full Answer >>
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