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A Microeconomic Foundation for Optimum Currency Areas: The Case for Perfect Capital Mobility and Immobile Labor Forces

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DOI: 10.4236/tel.2012.24073    3,534 Downloads   5,302 Views   Citations
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ABSTRACT

This article provides a microeconomic foundation for Mundell’s optimum currency area theory. We consider twin countries where labor forces are fixed to each country although the real capital moves internationally. When the central bank in each country behaves non-cooperatively, it will raise the domestic interest rate to attract more real capital and increase the rent of her residences. However, the fierce competition between the central banks ultimately exacerbates the disparity in income distribution. Moreover, when the real capital or the financial intermediary as its agent does not have a nationality, the worsened income distribution also results in the inefficient resource allocation. Thus, such twin countries should unify their central banks and coordinate their monetary and interest policies. In other words, these countries constitute an optimum currency area.

Conflicts of Interest

The authors declare no conflicts of interest.

Cite this paper

M. Otaki, "A Microeconomic Foundation for Optimum Currency Areas: The Case for Perfect Capital Mobility and Immobile Labor Forces," Theoretical Economics Letters, Vol. 2 No. 4, 2012, pp. 395-399. doi: 10.4236/tel.2012.24073.

References

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