What is an optimum currency area?
What will be an ideal response?
An optimum currency area is an area that balances the microeconomic benefits of perfect exchange rate certainty against the costs of macroeconomic adjustment problems. The area is therefore suitable for the introduction of a single currency and monetary union. Sharing a currency across a border enhances price transparency (that is, makes prices easier to understand and compare across countries), lowers transactions costs, removes exchange rate uncertainty for investors and firms, and enhances competition. The potential cost of a single currency is the loss of independent monetary policies for the participating countries. If countries experience adverse shocks, such as a sudden fall in demand for a country's main export product or a sudden increase in the price of one of the main inputs for a country's manufacturing sector, it can no longer stave off a recession or unemployment through monetary policy actions when it has a common currency. It also cannot devalue its currency to try to regain competitiveness.
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