The endogeneity of optimum currency area criteria – lessons from history for European monetary union

Abstract

Purpose

Assesses whether the current pattern of relative wage rigidity and labour inertia in Europe is a problematic factor in the successful functioning of the European monetary union as viewed by many observers given the absence of interregional fiscal transfer payments.

Design/methodology/approach

Uses econometric methods to test whether the onset of monetary integration in the US and the gold standard in selected countries has increased the pro‐cyclical behaviour of real wages.

Findings

Finds suggestive empirical evidence that indeed a Lucas Critique argument applies such that credibly fixed exchange rate regimes might induce wages to carry the burden of macroeconomic adjustment in lieu of independent monetary policy and/or fiscal transfers.

Originality/value

Makes a novel contribution to the literature by attempting to test for the existence of endogenous adjustment mechanisms based on historical monetary unions analogous to EMU.

Citation

Mann‐Quirici, F. (2005), "The endogeneity of optimum currency area criteria – lessons from history for European monetary union", Journal of Economic Studies, Vol. 32 No. 5, pp. 387-405. https://doi.org/10.1108/01443580510622388