Exchange rate policies in the applicant countries in preparation for Economic and Monetary Union (EMU)

Abstract

The study analysed in some detail the OCA theory. It reviewed the traditional contributions to OCA theory, namely the works of Mundell, McKinnon and Kenen as well as some more recent literature on this theory. Although the OCA theory has received various criticism there does not seem to be any other theory able to substitute it. It is the best available approach that can be used to establish whether a group of countries form an OCA, and are able to substitute the exchange rate as a short-term adjustment tool in the eventuality of asymmetric shocks. The study reviewed the economic history of the candidate countries by reference to number of number of important economic indicators namely Gross Domestic Products (GDP), inflation, unemployment rate, budget deficit and current account deficit as a percentage of GDP. The level of structural reforms being taken by the candidate countries was also assessed. Through this analysis it was possible to assess which countries already form an OCA. For those countries that already form an OCA a relatively fixed exchange rate arrangement was recommended. Some of these countries that have achieved a high level of convergence have not yet reflected this in their exchange rate arrangement.