[ Pobierz całość w formacie PDF ]
But macroeconomists needed economies that met certain conditions in
order to accomplish these feats. First, since the monetary tools that the
macroeconomists can use have only one dimension expanding and con-
tracting the money supply to expand and contract overall domestic
demand they need an economy structured in such a way that all its sec-
tors expand or contract in a synchronized fashion. Otherwise, any mone-
tary policy would be excessively expansionary for some sectors, excessively
contractionary for others, and maybe optimal for only a few of them. To
ensure synchronicity in all possible circumstances, OCA theory specifies
that all or most sectors in the region in question should have a common
business cycle and react in the same way to external shocks. This would al-
low the authorities to design a monetary policy that would fit the needs of
all sectors; it would be expansionary when all sectors needed to expand
and contractionary when all sectors needed to cool off. Second, openness
to the rest of the world can spoil even the best, most synchronous Opti-
mum Currency Area. To avoid this, the economy must be relatively closed
to the rest of the world.
There are big theoretical problems with the concept of Optimum Cur-
rency Areas, as it has developed, which have big practical implications.
First, OCA theory actually conflicts with some of the most basic as-
sumptions of economic theory. For example, standard economics says that
a decline in banana prices signals the need to divert scarce resources away
from banana production. Not so OCA theory, which implies that a ba-
nana republic highly reliant on banana exports for income should, in
the face of a decline in the international price of bananas, devalue its
money, making everything the country needs to import more expensive,
in order to support banana production at the same level. This thinking is
at the very root of development stagnation in so many poor countries
around the world.
Second, OCA theory also conflicts with the standard economics of
risk, which prescribes diversification as the means to reduce it. OCA the-
ory establishes the homogeneity of economic structure as the primary
142 GLOBALIZATION AND MONETARY SOVEREIGNTY
condition for a region to qualify as an Optimum Currency Area. This is
so because regions with homogeneous economies such as countries de-
pendent on the export of a single commodity, like bananas will tend to
move in identical ways through the business cycle and react in identical
ways both to external shocks and to the monetary policies devised by the
central bank to counterbalance them. In contrast, macroeconomists
would have problems devising monetary policies for nonhomogeneous
economies with sectors or regions moving in nonsynchronous ways. In
such a case, the monetary policy that would be optimal for one sector or
region would be suboptimal for, or even damaging to, other sectors or
regions. Said in another way, a financial and monetary environment in
which all risks are highly correlated would be safer, according to OCA
theory, than one in which the risks were uncorrelated. OCA theory thus
clashes with the basic mathematics of risk, on the assumption that central
bank macroeconomists can correct for the undesirable correlation of eco-
nomic risks more efficiently than a diversification of the economy.
Third, OCA theory assumes that the uniformity of business cycles and
reactions to external shocks are a geographical, rather than a sectoral, fea-
ture. This is far from apparent in reality. It is very common, for instance,
to see countries that produce a commodity which follows one business cy-
cle and at the same time other products which follow very different ones.
The United Kingdom, being an oil producer, an industrial country, and
an international financial services center, is a clear example. A fall in oil
prices would not necessarily reduce activity in London s financial sector,
or that of the country s various industrial activities. Seen logically from
the perspective of OCA theory, the city blocks in London where the
buildings of BP and Shell are located should have one currency, while the
blocks where Citigroup and Goldman Sachs are headquartered should
have another. This would doubtless create jobs on the corners of these
blocks, as exchange houses would emerge to serve the neighborhood cafe-
terias. A buoyant derivatives market might also develop to hedge against
exchange rate divergences between salaries, on the one hand, and housing
costs and the like on the other. The question of what currency should be
used in residential neighborhoods would be an interesting one, as next-
door neighbors could work in different currency areas. In short, logically
dividing economies by region, as OCA theory does, may have made some
GLOBALIZATION AND MONETARY SOVEREIGNTY 143
sense in the days when California mined gold, Chicago made sausages,
Georgia spun cotton, and Boston wove textiles, but in today s modern di-
versified economy it makes little sense.
Finally, OCA theory assumes a static economy. Yet the introduction of
new economic activities, which follow different business cycle paths, will
logically erode the optimality of a currency area. For example, it would, from
a monetary perspective, be detrimental for a country dependent on coffee
production to develop industrial activities with business cycles uncorrelated
with that of coffee, even though the experience of the last several decades
demonstrates the importance to economic development of diversifying the
economy away from dependence on coffee as dollarized El Salvador has
done. But this would interfere with the ability of macroeconomists to opti-
mize monetary policy for a coffee-dependent country, and is therefore fre-
quently cited by them as a reason for having a national currency and a
floating exchange rate, rather than as a reason for ending the deadly depend-
[ Pobierz całość w formacie PDF ]