Optimal Currency Area

The geographic area in which a single currency would create the greatest economic benefit. 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. The theory of the optimal currency area was pioneered by economist Robert Mundell. The four often cited criteria for a successful currency area are:

- Labor mobility across the region.

- Openness with capital mobility and price and wage flexibility across the region.

- A risk sharing system such as an automatic fiscal transfer mechanism to redistribute money to areas/sectors which have been adversely affected by the first two characteristics.

- Participant countries have similar business cycles.