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

ISSN： 0144-3585

Source： Journal of Economic Studies, Vol.32, Iss.5, 2005-01, pp. : 387-405

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Abstract

Purpose â–“ 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 â–“ 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 â–“ 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 â–“ 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.