A system of flexible exchange rates is usually presented, by its proponents, as a device whereby depreciation can take the place of unemployment when the external balance is in deficit, and appreciation can replace inflation when it is in surplus.
But the question then arises whether all existing national currencies should be flexible. Should the Ghanian pound be freed to fluctuate against all currencies or ought the present sterling area currencies remain pegged to the pound sterling? Or, supposing that the Common Market countries proceed with their plans for economic union, should these countries allow each national currency to fluctuate, or would a single currency area be preferable? The problem can be posed in a general and more revealing way by defining a currency area as a domain within which exchange rates are fixed and asking: What is the appropriate domain of a currency area?
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“The question Mundell posed in his article on "optimum currency areas" (1961) therefore seemed radical: when is it advantageous for a number of regions to relinquish their monetary sovereignty in favor of a common currency?" Nobel Press Release
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