On the choice of the exchange-rate regimes

Abstract

This paper utilizes recent research developments in portfolio balance theory and in real exchange-rate instability to synthesize, update, and test the optimum currency area (OCA) theory. Four hypotheses, capturing the central features of the OCA theory, are advanced and tested in a multinomial-logit setup. the empirical results establish the linkage between a fixed rate and financial integration, trade integration, plus inflation convergence. the Mundell-Fleming ranking of regime is refuted in a fundamental way. these findings are applied to a discussion of European monetary integration, in relation to both its final objective and its intermediate procedure.Foreign exchange rates