Optimal Currency Areas, Large and Small

After lying dormant for about fifteen years (1975–89), the theory of optimum currency areas (OCAs) has awakened and is being exercised by international economists and national politicians. There are three main current applications of OCA theory. The first, and most obvious, is Economic and Monetary Union (EMU) in Western Europe, an area with an eastern boundary that is moving east. The second application is analysis of the emerging tri-polar currency world of the dollar, the yen, and the European Currency Unit (ECU). These are the ‘large’ areas of my title. The third application is the analysis and perhaps design of the evolution of currency and exchange rate arrangements in Central Europe (by this term I mean the formerly centrally planned economies that were called Eastern Europe) and the former Soviet Union, which I will refer to as the Baltics and (optimistically) the Commonwealth of Independent States (CIS). These are the ‘small’ areas of my title. Since EMU has been extensively studied, I will concentrate here on the other two applications of OCA theory.