• René Holm Jensen
4. term, Science in Economics, Master (Master Programme)
Since the financial crisis in 2007 the Eurozone has received a lot of questions whether it is an optimum currency area or not. Especially the asymmetric movements within the Eurozone are highlighted, e.g. Spain and Greece experience high unemployment and Germany low unemployment. This dissertation uses the well-known OCA criteria that were published by Robert Mundell in 1961, to determine whether the Eurozone is an optimum currency area or not - primarily within economic preferences. The conclusion of this analysis is that the Eurozone is not an optimum currency area, but could be in the future based on the developments for the figures from 1999 to 2013. After the analysis of the OCA criteria, the original Taylor rule and a modified Taylor rule are being tested on ECB and some countries from the Eurozone. The modified Taylor rule is the best to tell ECB monetary policy, but this has some complications because it primarily uses the lagged interest rate to determine the future interest rate. Therefore the countries’ economic situations are not weighted as much as it should be. The analysis shows that the countries’ Taylor rules are different – mainly due to the different economic situations. To determine whether the Eurozone could be an optimum currency area is what the Endogeneity theory is based on. It assumes that after countries decide to share a single currency, they begin the development towards an optimum currency area. This is due to the fact that the countries within the currency area become more and more synchronic, because they trade much more with each other. The analysis shows that this theory is true to the Eurozone, because the correlations of the economic cycles are significantly high. The liquidity trap for the Eurozone can be solved with a depreciation of the Euro, but since ECB is keen to keep the inflation low and stable it is difficult for members of the Eurozone to get an economic boost. But with this in mind, the future for the Eurozone is looking to improve, mainly because the new and small members are experiencing a “catching up” period with the “core” of the Eurozone. But Greece still has some trouble to deal with, which can be solved with a fiscal integration. The conclusion for this dissertation is that the Eurozone is not an optimum currency area, but the future looks bright due to the economic figures. But ECB has some difficulties to determine the interest rate, due to the fact that the countries’ economic situations are different.
Publication date2 Jun 2015
Number of pages88
Publishing institutionAalborg Universitet
ID: 213406865