Theoretical and Empirical Discussions on Endogeneities of OCA Criteria

The optimum currency areas (OCA) theory deals with the criteria as well as the costs and benefits of for countries to enter/form a common currency area. The traditional OCA theory explores the economic variables determining the boarders for OCA, and whether a single country fulfills the requirements to join an OCA by employing the static costs and benefits analysis. The endogenous OCA theory introduces the long-run dynamic equilibrium analysis into the cost-benefit balance model and suggests that economic and monetary integration are self reinforcing processes, i.e., the endogenous nature of OCA criteria may make a country be more likely to satisfy the criteria for the entry into a currency union ex post though it fails ex ante, which in turn reduces the costs of a currency union by increasing the symmetry of disturbances. Although the creation of the euro is often cited as the most modern and largest-scale case study of OCA, the evolvement of economic integration in other regions, especially East Asia, has increased interest in the viability of a common currency for economies in these regions. The previous studies in Euro Union could provide us new perspective and useful instruments of analysis with respect to the study on other regions. This paper surveys the evolution of the theoretical and empirical studies on endogeneities of OCA criteria in order to draw inferences for the prospects and challenges of greater monetary cooperation in other regions.