An Approach For Thinking About Monetary Integration Economics Essay

An optimal currency country ( OCA ) , besides known as an optimum currency part ( OCR ) , is a geographical part in which it would maximise economic efficiency to hold the full part portion a individual currency. It describes the optimum features for the amalgamation of currencies or the creative activity of a new currency. The theory is used frequently to reason whether or non a certain part is ready to go a pecuniary brotherhood[ 1 ].

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Optimum currency country theoretical account originates in 1960s and was founded by the economic expert Robert Mundell.

Mundell published the first article on the optimal currency country ( OCA ) specifying optimal currency country as an country with internal factor mobility ( including both interregional and inter-industrial mobility ) and external factor stationariness[ 2 ].

Mundell came up with two theoretical accounts which can be distinguished from each other:

Oca with stationary outlooks

The first theoretical account was published in 1961. In this theoretical account Mundell considers asymmetric dazes to sabotage the existent economic system, so if they are excessively of import and can non be controlled, a government with drifting rates is considered better, because the planetary pecuniary policy ( involvement rates ) will non be all right tuned for the peculiar state of affairs of each component part[ 3 ].

In this instance the four frequently cited standards for a successful currency brotherhood are:

Labor mobility across the part. This standard includes physical ability to go ( visas, workers ‘ rights, etc. ) , deficiency of cultural barriers to free motion ( such as different linguistic communications ) and institutional agreements ( such as the ability to hold old-age pension transferred throughout the part ) . In the instance of the Eurozone, while capital is rather nomadic, labour mobility is comparatively low.

Openness with capital mobility and monetary value and pay flexibleness across the part. This is so that the market forces of supply and demand automatically distribute money and goods to where they are needed. In pattern this does non work absolutely as there is no true pay flexibleness. The Eurozone members trade to a great extent with each other ( intra-European trade is greater than international trade ) , and most recent empirical analyses of the ‘euro consequence ‘ suggest that the individual currency has increased trade by 5 to 15 per centum in the euro-zone when compared to merchandise between non-euro states.

A hazard sharing system such as an automatic financial transportation mechanism to redistribute money to areas/sectors which have been adversely affected by the first two features. This normally takes the signifier of revenue enhancement redistribution to less developed countries of a country/region. This policy, though theoretically accepted, is politically hard to implement as the better-off parts seldom give up their gross easy. Theoretically, Europe has no bail-out clause in the stableness and growing treaty, significance that financial transportations are non allowed, but it is impossible to cognize what will go on in pattern.

Participant counties have similar concern rhythms. When on state experiences a roar or recession, other states in the brotherhood is likely to follow. This allows the shared cardinal bank to advance growing in downswings and to incorporate rising prices in roars.

While Europe scores good on some of the steps qualifying an OCA, it has lower labor mobility than the United States and likewise can non trust on financial federalism to smooth out regional economic perturbations. Besides, its Gini coefficient of 31 should hold a stabilising consequence ; in comparing, the USA has a Gini index of 46.9 ( a lower step indicates a more even distribution of wealth ) .

Extra standards suggested are:

Production variegation

Homogeneous penchants

Commonalty of fate

This theory has been most often applied in recent old ages to the euro and the European Union.

Oca with international hazard sharing

But in his two later articles, Mundell ( 1973 ) wholly changed the debate about the optimal currency country. Here Mundell tries to pattern how exchange rate uncertainness will interfere with the economic system ( publication in 1973 ) . His planetary monetarist position on the topic was as follows: If two states can follow a common currency ( that needs a common cardinal bank and foreign militias ) without significant alteration in their buying paras, they gain better allotment of capital. As a consequence, they will acquire rid of uncertainness in the development of exchange rates and assets will be better diversified[ 4 ]. Supposing that the currency is managed decently, the larger the country, the better[ 5 ]. In contrast with the old theoretical account, asymmetric dazes are non considered to sabotage the common currency because of the being of the common currency. This spreads the dazes in the country because all parts portion claims on each other in the same currency and can utilize them for dumping the daze, while in a flexible exchange rate government, the cost will be concentrated on the single parts, since the devaluation will cut down its purchasing power. So despite a less all right tuned pecuniary policy the existent economic system should make better. A harvest failure, work stoppages, or war, in one of the states causes a loss of existent income, but the usage of a common currency ( or foreign exchange militias ) allows the state to run down its currency retentions and shock absorber the impact of the loss, pulling on the resources of the other state until the cost of the accommodation has been expeditiously spread over the hereafter. If, on the other manus, the two states use separate monies with flexible exchange rates, the whole loss has to be borne entirely ; the common currency can non function as a daze absorber for the state as a whole except insofar as the dumping of unconvertible currencies on foreign markets attracts a bad capital influx in favour of the depreciating currency. Robert A. Mundell is found in both sides of the argument about the euro. Most economic experts cite preferentially the first ( stationary outlooks ) and conclude against the euro, yet Mundell advocates this one, and concludes in favor of the euro. Rather than traveling toward more flexibleness in exchange rates within Europe the economic statements suggest less flexibleness and a closer integrating of capital markets. These economic statements are supported by societal statements as good. On every juncture when a societal perturbation leads to the menace of a work stoppage, and the work stoppage to an addition in rewards unjustified by additions in productiveness and thence to devaluation, the national currency becomes threatened. Long-run costs for the state as a whole are bartered off by authoritiess for what they presume to be short-term political benefits. If alternatively, the European currencies were bound together perturbations in the state would be cushioned, with the daze weakened by capital motions.

II – Costss and benefits of Joining the Monetary Union

An interesting facet of the 2nd watercourse literature of placing costs and benefits of fall ining the pecuniary brotherhood is that the relevant benefits are normally at microeconomic degree, while costs at macroeconomic degree. There are several issues to be discussed[ 6 ].


First, the loss of power to impact a national money supply is lawfully feared, since, in an incorporate market, all member states will jointly command their pecuniary policy. Typically, the loss of a state ‘s ability to utilize the exchange rate and pecuniary policy for stabilisation was considered to be the most of import cost of fall ining a currency country. However, this is certainly non the instance for little unfastened economic systems, because it is impossible to keep free capital mobility and an independent pecuniary policy together. Such states link their currencies to their chief trading spouses in order to derive higher exchange rate stableness. This lowers the independency of pecuniary policy. The statement about the loss of pecuniary and exchange rate policy was particularly emphasized in the early 1970s when tonss of writers believed in a negatively sloped Phillips curve. In that instance, the common currency could connote that a state with a higher unemployment rate, relative to other members of the currency country, would no longer have the option of utilizing a pecuniary policy. As a consequence, state would non accomplish the coveted mix of rising prices and unemployment.

Second, there are concerns about financial policy. It is non clear what the deduction of the rank is in the currency country for an independent financial policy.It does non necessitate to be expected that pecuniary brotherhood mean the terminal of the independent financial policy for its member provinces. It is likely that even in the complete pecuniary brotherhood states keep their financial policies independent ; nevertheless some centralisation of financial policies could function as one of the mechanisms in seting to the asymmetric daze. On the other manus, the centralisation of budgets frequently leads to an addition in disbursement.

Third, another cost of fall ining a currency country is the loss of seignorage. Seignorage is the gross the authorities obtains by financing its budget shortage through publishing money instead than selling debt. That ‘s why at full employment publishing money would take to rising prices. Seignorage is often besides called the ‘inflation revenue enhancement ‘ . It is mostly a policy inquiry how seignorage would be distributed in the instance of pecuniary brotherhood. In Western Europe merely in some southern states seignorage was estimated to be more than one per centum of GDP and the ratio is quickly diminishing in clip[ 7 ].

Fourth, in an unsure universe risk-averse families and houses would derive public assistance ( after the riddance of accommodation costs ) if one of the beginnings of uncertainness in exchange rates were eliminated. This statement implicitly assumes that exchange rates volatility has a negative consequence on economic computation. If the exchange rate reflects the motions in basicss, so volatility does non count.


We can besides reason that if the motions of exchange rates reflect feelings, guess etc. , so high volatility could take to misallocation of resources. But the lessening in the uncertainness of the development of exchange rates lowers the expected net income of investing, which could later act upon end product ; therefore the theoretical result is equivocal.

The riddance of interchanging one currency for another is the most seeable benefit of pecuniary brotherhood, intending the riddance of dealing costs.

States can profit from higher trade integrating, which leads to the more effectual allotment of resources

A better public presentation of money as a medium of exchange an as a unit of history. They correspond to the efficiency additions from: the eliminiation of the comparative monetary value deformations generated by the dealing costs and the riddance of exchange rate uncertainness[ 8 ].

It is really hard to place the benefits deducing from a individual currency, both theoretically and through empirical observation. It seems sensible, nevertheless, to presume that these benefits addition with the degree of trade between the two campaigner countries, and hence with their grade of openness.

However, there are besides indirect benefits from the riddance of the national currencies, such as a lessening in monetary value favoritism[ 9 ].

III – Can the OCA theory be applied in Albania?

Zace M. and Laci E. in their research paper about the OCA theory: Case of Albania, have analyzed whether Albania ‘s present economic state of affairs can successfully fall in the currency country, the Eurozone[ 10 ].

The Euroisation of the conomy, means that the state becomes portion of an pecuniary economic brotherhood with the Euro zone. What does it intend to be a member of a pecuniary brotherhood? There are three chief features of it:

Frist, being member of a pecuniary brotherhood means to give up from your pecuniary sovereignty. The pecuniary policy, including realisation of this policy, scheme and the execution instruments, are all europian.

Second, the pecuniary brotherhood is realized that it can last in clip. The minute you get in, you can non turn back once more. Turndown of such a determination would hold incomputable economic and political cost.

Third, the Euro zone, differs from all the other pecuniary zones, which are cited, as zones of merely one autonomous state[ 11 ].

After several empirical analysis, the researches of this field have concluded that the undermentioned belongingss are approved to be portion of OCA theory:

a. Monetary value and pay flexibleness

b. Labour market integrating

c. Factor market integrating

d. Financial market integrating

f. The variegation in production and ingestion

g. Similarities of rising prices rates

h. Fiscal integrating

I. Political integrating

j. Similarity of dazes

Based on OCA theory: Is Albania ready for euroisation? We can analyse the belongingss of the theory for the instance of Albania as follow:

Size and openness

Albania is a really little state, with a population of merely 3.17 million people which is about merely 0.9 % of 314 million people that live in EU ( 2006 ) . Its mean portion of GDP ( at current monetary values and exchange rates ) relative to EMU states is merely 0.05 % for period 1997Q1-2005Q4. Therefore, its size does non let Albania to act upon monetary values in the universe market. Albania operates a well liberalized trade government. It is WTO member since 2000. Most of the industrial merchandises are already to the full

liberalized or with really low duty ( 2 % ) . Albania has signed a FTA with the other states in the part ( more specifically with Macedonia, Croatia, Bulgaria, Romania, Kosovo, Serbia and Montenegro, Moldova and Bosnia and Herzegovina ) . In the tabular array 1 there is a general position of entire trade as per centum of GDP for the Balkan Countries. If we refer to the resonance of trade with EU to entire trade, the state of affairs of Albania is ranged the first in the Balkan with 68.4 per centum for twelvemonth 2005.

Table 1: Trade as % of GDP for the Balkan Countries ( 2005 )

Table 2 refers to the comparing between Albania to the other states of the part sing trade and FDI indexs for twelvemonth 2006. For the instance of Albania, harmonizing to 2007 Annual Report of Bank of Albania and 2007 Balance of Payment Booklet, the twelvemonth 2007 has show that Export/GDP has raised to 10.2 % , Trade openness to 84 % and FDI/GDP to 6 % . Import coverage remains about the same during both old ages.

Table 2: Trade and FDI indexs during 2006 ( in % )

To mensurate the trade openness of Albania and the strength of trade with EU states the writers use two indexs:

– The grade of openness, measured as the portion of entire trade ( exports +

imports in both goods and services ) to GDP at current monetary values.

– The geographical concentration of trade, measured as the portion of trade with

EU states to entire trade ( for each exports and imports ) .

Albania has been profiting from EU ‘s independent trade penchants since 2000.These penchants imply that all Albanian industrial merchandises and most Albanian agricultural and fishery merchandises can entree EU markets responsibility and quota free. The entry in force of the SAA will beef up even more the trade relationship between Albania and EU since a FTA should be established between Albania and the EU in.

A high geographical concentration of a state ‘s trade favors nail downing the currency to its chief trading spouse. Albania ‘s economic system, among other states in the part, is the most sensitive 1s toward the euro exchange rate volatility, therefore the 1 that will profit more from taking the exchange rate uncertainness. Sing the hereafter chance of beef uping the trade integrating with EU states, with the clip, the

advantages of taking exchange rate uncertainness will go even more obvious.

Symmetry of hits

Harmonizing to Mundell ‘s theory, states which are exposed to symmetric hits or those possessing mechanisms for absorbing asymmetric hits could be optimum for following a common currency. The being of asymmetric dazes is an obstruction on a state ‘s manner to organizing a currency country, because it compromises the exchange rate stableness between two states and lowers the public-service corporation of following a fixed exchange rate government. The writers identify the dazes in the existent sector and mensurate their magnitude for Albania every bit good as for some other states in the part which have already joined the EU.

Table 4: The magnitude of the existent asymmetric dazes between some

Balkan states and EMU ( 12 ) ( 1995 – 2005 )

As we can see, this index for Albania is good below those of other Balkan states which have already joined the EU. This can be explained by the fact that Albania is the state that trades with EU more than any other state in the part. Greater the trade strength, the more consonant the concern rhythms between the economic systems in inquiry. The index is even smaller if we exclude from the appraisal the information of the twelvemonth 1997 which, because of the economic and political convulsion of that twelvemonth exposed Albania do asymmetric hits mentioning to EU. However, bearing in head the jobs with the dependability of the informations on the macroeconomic indexs in Albania,

this consequence should be considered with due cautiousness.

Labour mobility

If existent rewards are stiff, the load of asymmetric dazes falls on employment. In such a instance, the inauspicious consequence of asymmetric hits can be adjusted by high factor mobility, particularly labour. Labor mobility in Albania is reasonably high, due to a big part of the population life and working in the EU states. Since 1990, 500-600,000 Albanians have left the state and have emigrated to the developed states, chiefly to EU states. This corresponds to more than 15 % of the population as a whole, 26 % of the population in the on the job age and 35 % of the labour force. Countries to which Albanians emigrate most are chiefly those geographically close to Albania, with certain economic, historical and cultural ties. About 80 % of Albanian

emigres are settled in Greece and Italy, working chiefly in agribusiness, building, trade and housework activities. The others have chosen Germany, England, France, Belgium and few have emigrated in USA and Canada. The bulk of them are already legalized, which mean that they can easy travel back and away each clip they need to make so. The out-migration has helped to smooth the effects of the passage and the related diminution in existent rewards. It has besides helped to chair the force per unit area on the active population and therefore cut downing the figure of unemployment. The economic impact of factor motion is big since remittals and income from

seasonal labour abroad form a big and uninterrupted portion of the Albanian GDP ( about 15 % ) and they are about twice the sum of exports.

Capital mobility and capital market integrating

A cardinal ingredient to absorb any asymmetric hits is the capital mobility, which implies international arbitrage across states. Albania is regarded as a state with low barriers to foreign capital influxs and direct investings. The government on capital motion is set out in July 2003, on the footing of the Law of Bank of Albania and of the 1993 Law on Foreign Investment. Harmonizing to this government, there are no restrictions on inward direct investings ( except purchases of existent estates by aliens in Albania ) , there is no blessing procedure and no sector is closed to foreign investing. Repatriation and ab initio invested foreign capital every bit good as the net incomes face no obstruction in go forthing the state. However, escapes of capital are still capable to limitations. In order to be able to reassign capital abroad, physical and judicial individuals every bit good as persons, occupants of Albania, need to have the blessing of accredited topics ( commercial Bankss ) . The ceiling on the sum that could be transferred abroad by a individual person is 28.000 US dollar ( increased from 20.000 US dollar until 2002 ) . The jurisprudence regulated by the BoA does n’t let occupants to transport out direct investing abroad, investing in foreign securities, imparting to non-residents, etc. However, it is believed that Albanian occupants reassign capital out of the state through illegal channels. Therefore, sing the capital motion between in Albania, we can reason that it is extremely liberalized on the side of influxs and more liberalized than suggested by the jurisprudence on the side of escapes. An index of the capital mobility can be the capital history openness – measured as the ratio of the amount of the absolute value of influxs and escapes of capital ( FDI and portfolio investings ) to GDP. Despite installations in the jurisprudence, the capital influxs and escapes in Albania are comparatively. FDI flow in Albania, as a portion of GDP is comparatively low, merely 5 % . Although Albania is good positioned to pull foreign direct investings, with its

favourable geographical location, competitory wages and natural resources, foreign investors fear to near Albania. There are several grounds behind this, such as technological factors, which may ensue in differences in production, the presence of informal economic system, ill-defined belongings rights, and low degrees of recognition. At the same clip, an developing fiscal system offer few chances for portfolio investings in Albania, comparison to more developed states in EU. However, it is worthy to advert the undeniable fact that the informations on the capital history, like the bulk of

statistics in Albania, are capable to some erroneous enrollments, appraisals and misspecifications. Based on these observations, we can reason that incoming or surpassing capital in Albania might be higher than those reported. Albania ‘s capital market is extremely incorporate with that of the EU. EU states have a dominant place in foreign direct investing in Albania. Harmonizing to BOA, in 2006, 434 out of 526 direct investing endeavors, had engagement of European Union capital, of which 269 Italian and 128 Greek. This constitutes 82.5 % of entire direct investings in Albania. The EU investings ‘ presence in Albania is another factor of cut downing the hazard of asymmetric economic hits. Their sensitive presence in industrial sectors

makes these houses to be affected by economic hits the same manner their female parent

companies are in their states of beginning. Net consequence of this factor is the addition of the symmetricalness of economic hits.

In the close hereafter, we expect the capital history in Albania to be to the full liberalized. This is a committedness to run into the demands of WTO and EU. At the same clip, the assignment of SAA has imposed on Albania certain conditions sing the capital mobility between Albania and EU states. The classs of capital motion, which to day of the month are subjects to limitations, will be to the full liberalized in 5 old ages, as stated in SAA.

Similarities of rising prices rate

When rising prices rates between states are low and similar over clip, footings of trade will besides stay reasonably stable. This will further more equilibrated current history minutess and trade, cut downing the demand for nominal exchange rate accommodations.

Chart 2: Average one-year rising prices rate 1993 – 2007

Chart 3: Albania – EU one-year rising prices rate 1998 – 2006

Albania has keeps maintaing a low rising prices rate even during 2009, near 1 % . As an economic system exposed to imports ( about 4 times higher than exports ) , Albania is necessarily impacted by imported rising prices degree, chiefly from its biggest trading spouses, Italy and Greece. Out of study made by the Institute of Statistics in 2005, it resulted that about 46 % of the consumer basket goods are imported goods. Therefore, their monetary value public presentation ( uniting their monetary value in the national currency with the exchange rate ) takes much importance in explicating the rising prices rate in Albania and makes the rising prices behaviour in Albania much similar to that of the EU states.

Monetary value and pay flexibleness

Flexible monetary values and rewards would be a good replacement for pecuniary policy since dazes could be absorbed by alterations in rewards and monetary values, which cut down the force per unit area for exchange rate accommodations. In instance of Albania, monetary values are extremely flexible. Despite monetary values of H2O, railroad conveyance and electricity which are still affected by the authorities subsidies, all the other monetary values are to the full liberalized. However, there have been assorted signals about the flexibleness of rewards. The velocity of accommodation after major dazes in 1992-1997 could be interpreted as an grounds of flexibleness in pay accommodations. However, we notice a weak correlativity between nominal pay degrees and employment. The deficiency of informations on this sector makes it hard to make to a definite decision and this issue needs deeper analysis.

Diversification in production and exports

If we have a speedy expression on the beginning of GDP in Albania, we notice a quiet well- diversified construction of production. We can detect the same construction of GDP portion harmonizing to sectors for the instant old ages.

While production seems to be diversified, exports variegation remains lower. Albania ‘s export construction is geared toward labor-intensive merchandises. On a sector degree, EU chiefly imports manufactured merchandises from Albania, which accounts for 88 % of Albania ‘s EU-orientated exports. Fabrics and vesture, together with footwear and leather merchandises play an of import function in Albania ‘s exports to EU, accounting for approximately 64 % of its entire trade. The EU chief exports to Albania are machinery equipment and other manufactured merchandises. However, the writers note that the job of diverse production and export in Albania is much less acute than the job with the quality of the merchandises. This difference in quality renders any

comparing between Albania and EU states inaccurate.

Table 6: The Geography of Albania ‘s ‘ Trade Flow ( 2007 )

A sound banking and fiscal system and fiscal integrating

A stable and developed banking and fiscal system is a stipulation for euroisation, as loaner of last resort maps of the cardinal bank disappear along with the domestic currency. Fiscal system in Albania is little and dominated by the banking sector, which represents 90 % of formal fiscal system assets. Albania has completed the procedure of denationalization of the banking system with the denationalization of the largest bank in the state, the Savings Bank, by the Raiffeisen Bank of Austria, in 2004. The banking sector in Albania is comprised of 16 Bankss after 2007[ 12 ]( until 2007 Albania had 17 Bankss ) – 2 Albanian and 14 foreign owned/joint ventures. The major portion of the foreign-owned Bankss several of the 16 Bankss are subdivisions of big European Bankss, which shows a high grade of banking sector integrating between Albania and EU. The largest bank in Albania, the Raiffeisen Bank, histories for approximately 54 % of sedimentations and 70 % of authorities debt held by the banking system.

However, despite the above mentioned important advancement, the Albanian banking system remains comparatively developing with regard to the EU criterions. A good index of the fiscal development can be the recognition to the private sector as a portion of GDP or of entire domestic recognition. Although, the recognition to the private sector makes up the largest portion of entire domestic recognition in Albania, it remains still low with regard to GDP. While the Albanian banking sector has demonstrated comparatively good

public presentation in recent old ages, other fiscal system sectors remain less developed. The little size of non-bank fiscal establishments is a effect of the deficiency of apprehension of fiscal merchandises and services by possible users, and the still fundamental degree of basic fiscal substructure. As for the capital markets and the usage of different fiscal instruments, though bing, they are still shallow and far from the criterion of their opposite numbers in the EU states. The authorities separated the Tirana Stock Exchange from the Bank of Albania, efficaciously making an independent stock market in the state ; nevertheless trading is limited to treasury bonds and denationalization verifiers. A complete appraisal of the soundness of the banking and fiscal system in Albania deserves a deeper analysis, which is beyond the range of this paper. However, the writers conclude that there exists the necessity to further beef up the fiscal sector before a possible one-sided acceptance of the Euro.

IV – Decisions

This paper has provided an overview of OCA theory, and the tow theoretical accounts of Mundell. Joining a pecuniary brotherhood can lift different cost but on the other manus a state can besides profit. But the successful experiences of EU show that the association to a currency brotherhood is now deemed to bring forth fewer costs in footings of the loss of liberty of domestic macroeconomic policies.

Summarizing up, this preliminary analysis indicates that Albania satisfies the chief standards of OCA at a satisfactory degree. It is a little and comparatively unfastened economic system, with a high trade concentration and high degree of fiscal integrating with EU. Albania does n’t look to be really exposed to asymmetric hits with EU states, comparison to other states in the part. We expect any possible asymmetric daze in the economic system to be absorbed by flexible monetary values and labour mobility, which can be considered as comparatively high, due to the great figure of emigres that live and work lawfully in the EU states. However, there exist dubious groundss on the export variegation and pay flexibleness. Albania ‘s rising prices rate has shown low degrees since the crisis of 1997-1998, demoing a similarity with that of the EU states at satisfactory degrees. The banking and fiscal system development in Albania, although under-developed comparison to that of EU, is turning significantly due to an increased competition and fiscal deepening, puting the phase for a recognition roar in the hereafter. Therefore, from the traditional OCA point of position does n’t look that the acceptance of Euro could present inordinate hazard of destabilising either side to the point of countervailing the benefits of an early euroisation.

V – Mentions

Horvath R. & A ; Komarek L, Optimum currency country theory: An attack for believing about pecuniary integrating, Research paper No. 647

Xhepa S. , Euroizimi I ekonomise shqiptare, nje alternate per tu konsideruar, February 2002

Richi L. , A theoretical account of an Optimum Currency Area, June 1997

Zace M. , Laci E. , Optimum Currency Area Theory: Albanian Case, 2008

Xhepa S. , Euroizimi I ekonomise shqiptare, nje alternate per tu konsideruar, February 2002

Bank of Albania, Buletini Ekonomik, September 2009

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