Mundell’s Theory of Optimum Currency Areas in top 20 of 100 years of American Economic Review

February 10, 2011

100 Years of the American Economic Review:
The Top 20 Articles

The American Economic Association (AEA) is pleased to announce the 100th anniversary of the American Economic Review (AER), first published in 1911. The AER, a general-interest economics journal with articles on a broad range of topics, is among the nation’s oldest and most respected scholarly journals in the economics profession. To commemorate the 100th anniversary, the American Economic Review centenary issue will include a paper on the 20 most important articles from the AER’s first 100 years of publishing.

A Theory of Optimum Currency Areas (1961), by Robert Mundell, was selected for the Top 20.

This paper explains that selecting the optimal geographic area for a single currency involves balancing two considerations. Macroeconomic stability is enhanced if the currency area has a high degree of internal factor mobility relative to the cross-border factor mobility. Taken by itself, this could lead to an excessively large number of currency areas, in the sense that there would be substantial transaction costs and valuation costs involved in making cross-area purchases. The optimal size of a currency area involves balancing these two considerations. Mundell discussed the potential application of this to the European countries some 30 years before the euro was introduced. [100 Years of the American Economic Review: The Top 20 Articles]

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