NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Endogeneity of the Optimum Currency Area Criteria

Jeffrey A. Frankel, Andrew K. Rose

NBER Working Paper No. 5700
Issued in August 1996
NBER Program(s):   ITI   IFM

A country's suitability for entry into a currency union depends on a number of economic conditions. These include, inter alia, the intensity of trade with other potential members of the currency union, and the extent to which domestic business cycles are correlated with those of the other countries. But international trade patterns and international business cycle correlations are endogenous. This paper develops and investigates the relationship between the two phenomena. Using thirty years of data for twenty industrialized countries, we uncover a strong and striking empirical finding: countries with closer trade links tend to have more tightly correlated business cycles. It follows that countries are more likely to satisfy the criteria for entry into a currency union after taking steps toward economic integration than before.

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Document Object Identifier (DOI): 10.3386/w5700

Published: The Economic Journal, Vol. 108, no. 449 (July 1998): 1009-1025. Reprinted in Swedish Economy Policy Review 4 (1997): 487-512. citation courtesy of

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