The Theory And Practice Reflection On The Optimal Currency Area--Based On The European Debt Crisis

It has always been the focus of national academic debate that whether a fixed exchange rate or a floating exchange rate should be chosen, and which exchange rate regime will bring the greatest economic benefit. The propose of the theory of optimal currency area has resolved this controversy properly. The union uses a common currency, which eliminates the internal effect of exchange rate and applies the unified monetary policy externally. This solution can not maintain the balance of trade between Member States, but also avoid the dispute of different exchange rate regime. It is the goal that European countries peruse the same perspectives of value and worldview. The optimum currency area theory has been implemented in Europe to test the accuracy of theory. With the formal establishment of the euro area and the join of the new member states, the economic influence of the Euro area has become greater and greater, and the euro has also become important component of the world's monetary system. However, drastic changes in the euro area in2010, with a series of member states sovereign debt default, and the debate of implement of aid policy, have caused the doubts of the Euro zone. For this reason many scholars have begun rethinking the reason of European debt crisis. As a starting point, this paper shows that European debt crisis comes from the deficiency of optimum currency areas theory. The starting point of optimum currency areas theory has no major problems, and there are three parts need to improve and supplement.First, the outbreak of the debt crisis in Europe is out of people's expectation. Because optimal currency area theory has taken effects in Europe, Euro zone economy has rapidly developed, and the position in the world economy has also been upgraded. However, the sudden outbreak of the debt crisis and the subsequent spread and slow relief has shown that there are some drawbacks in the optimum currency area theory. Thus, the first part of this paper will find the deficiency of the optimal currency area theory by analyzing the outbreak of the debt crisis from the perspectives of join criteria, policy coordination and exit mechanism, which will provide object and goal of study.Secondly, we should study further after finding the problem of optimal currency area theory. Therefore, the second part of this paper will study the contradictions among the join criteria, decentralized fiscal policy, unified monetary policy and the construction of optimal currency area exit mechanism. The third chapter will not discuss the problem that which criteria is the best. So this paper will build a unified analytical framework to help the existing member states determine whether they should join the optimal currency area.The first step will define the different criteria, and design an economic variable in accordance with its economic meaning. The second step analyzes the problem that the countries of optimum currency area should be divided into core countries and edge countries, and the core countries also are in a dominant position. The third step will assign every economic indicator value according to the classification of the core countries and the edge countries, and finally get a average test indicators.The fourth chapter analyzes the coordination issues between fiscal policy and monetary policy, and discusses the impact of decentralized fiscal policy and unified monetary policy. When first proposed the theory of optimum currency areas, they request to unify fiscal policy and monetary policy. But they relax these assumption in the subsequent development, the inspection found that it was easy to ask a country to abandon its currency, while it was hard to abandon its fiscal means.Therefore, the main purpose of this chapter is to analyze the member states in decentralized fiscal policy. Whether the member states could eliminate the economic instability due to the heterogeneity and asymmetric shocks by fiscal transfer payment? The results show that if the member states will recommend a good payment mechanism to resolve imbalance in economic development. The fifth chapter analyzes the problem that how the core countries and edge countries game if there is fiscal shock. Once the game did not reach, the member states should exit to maintain the optimal currency area stable. The focus of this chapter is that the design and construction of an optimal currency area exit mechanism, and we will focus on the design of a smooth exit path, so that the member states minimum the bad impact when they had to quit the optimal currency area.Finally, the end result of this paper is that the optimization of optimal currency area theory framework, and to supplement and complete this framework, so that the countries out of euro area will avoid the economic risks caused by the deficiency of optimal currency area theory.Overall, since the optimal currency area theory appeared, there are questions and controversy. But the success of the establishment of the euro area, it dispels the doubts of many people. Optimum currency area theory does solve the problem of monetary policy on the basis of the establishment of a new currency. However, the development of a theory always requires continuous improvement and reinforcement. The vision of this study is standing height of the world monetary system to test the influence of this theory. So we hope to see more common currency area to be built according to the optimum currency area theory.