[1] The creation of the euro is often cited because it provides the most modern and largest-scale case study of an attempt to identify an optimum currency area, and provides a comparative before-and-after model by which to test the principles of the theory.
Some economists have argued that the United States, for example, has some regions that do not fit into an optimal currency area with the rest of the country.
If, on the other hand, the two countries use separate monies with flexible exchange rates, the whole loss has to be borne alone; the common currency cannot serve as a shock absorber for the nation as a whole except insofar as the dumping of inconvertible currencies on foreign markets attracts a speculative capital inflow in favor of the depreciating currency.Mundell's work can be cited on both sides of the debate about the euro.
However, in 1973 Mundell himself constructed an argument on the basis of the second model that was more favorable to the concept of a (then-hypothetical) shared European currency.
[13] Likewise, a 1999 report for the Parliamentary Research Branch discussed the pros and cons of Canada adopting the American dollar.
My answer was that the advantages of a common currency in terms of information and transactions costs, etc., have to be enough to overcome any disadvantages arising from insufficient labour mobility.
[18] Many have argued that the EU did not actually meet the criteria for an OCA at the time the euro was adopted, and attribute the Eurozone's economic difficulties in part to continued failure to do so.
However, for most parts of the Eurozone, such levels of labour mobility and labor market integration remain a distant prospect.
[22] Such stabilizing transfers are not present in both the Eurozone and EU; thus, they cannot rely on fiscal federalism to smooth out regional economic disturbances.
[23][24] Michael Kouparitsas (Chicago Fed) considered the United States as divided into the eight regions of the Bureau of Economic Analysis,[a] (Far West, Rocky Mountain, Plains, Great Lakes, Mideast, New England, Southwest, and Southeast).
By developing a statistical model, he found that five of the eight regions of the country satisfied Mundell's criteria to form a single Optimal Currency Area.
argue that fiscal stimulus in the form of deficit spending is the most powerful method of fighting unemployment during a liquidity trap.
[citation needed] Such stimulus may not be possible if states in a monetary union are not allowed to run sufficient deficits.
In Mundell’s first model, countries regard all of the conditions as given, and assuming they have adequate information, they can then judge whether the costs of forming a currency union outweigh the benefits.
The United States is a good example: financial services are centered in New York City, entertainment in Los Angeles, and technology in Silicon Valley.
If specialization increases, each country will be less diversified and will face more asymmetric shocks; weakening the case for the self-fulfilling OCA argument.