Thesis advisor: Fabio Ghironi / This paper examines the likelihood that the United States would engage in a policy of exchange rate stabilization with the EMU. First, it examines the history of the exchange rate regimes in the United States and a review of literature on exchange rate theories. From a historical perspective, most literature and prominent economic theories focus on the Milton Friedman proposal of floating exchange rate regimes. Just as floating exchange rates were gaining prominence in the United States during the 1970s, European countries were attempting to compose a currency union which took the form of the European Monetary System in the late 1970s and eventually evolved into Europe’s Economic and Monetary Union which completed its last stage of development January 1, 1999. The importance of fixed exchange rate regimes and theories, most notably, Robert Mundell’s Theory of Optimal Currency Area is highlighted. In addition, the paradigm arguments on the relation between trade integration and synchronization of business cycles are discussed utilizing Paul Krugman and Tony Venables’ specialization hypothesis (1996) and comparing it to Jeffrey Frankel and Andrew Rose’ endogeneity hypothesis (1998). Second, this analysis shows that the United States’ economy is at a critical point in time in which it must reevaluate its stance on floating exchange rates. Particular attention is paid to current economic conditions in the United States and the EMU such as: the purchasing power of the euro with respect to the U.S. dollar, the recent decline of the dollar, the lackluster performance of the EMU with regard to some macroeconomic variables, and the profligate spending by the U.S. government which has contributed to the tremendous budget deficit. Third, this paper analyzes six properties of optimal currency area criteria: degree of economic openness, trade integration and similarity of economic structure, financial market integration, synchronization of business cycles, price flexibility, and mobility of labor as a factor of production. The countries of France and Germany are utilized as benchmarks (if they satisfy the criterion) against which the United States and EMU are compared. The time periods of (1946-1972) and (1973-2003) are utilized to highlight the advantages and disadvantages of various exchange rate regimes and to try and shed light on the endogeneity hypothesis and specialization hypothesis. This thesis concludes that France and Germany failed to satisfy certain OCA criteria such as business cycle synchronization, price flexibility, and mobility of labor as a factor of production. Although France and Germany did not fulfill all of the OCA properties, the United States and the EMU appear to be farther from optimality, only satisfying mobility of labor as a factor of production. Finally, according to this paper neither the endogeneity hypothesis nor the specialization hypothesis dominates. Therefore, the United States should not stabilize rates with the EMU because it will most likely incur greater costs than benefits since it does not form an optimal currency area with the EMU. Intermediate exchange rate policies should be evaluated and further research conducted to enhance OCA criteria and make it a more scientific and effective tool for policymakers. The findings of this paper shed light on the history of exchange rate regimes, exchange rate theories, and current economic conditions that warrant a reevaluation of the United States’ foreign exchange rate position while at the same time indicating which characteristics of the U.S. economy satisfy optimality and emphasizing the importance of further research in this field. / Thesis (BS) — Boston College, 2005. / Submitted to: Boston College. College of Arts and Sciences. / Discipline: Economics. / Discipline: College Honors Program.

Submitted by Maicon Juliano Schmidt (maicons) on 2015-03-21T13:51:44Z No. of bitstreams: 1 Jaqueline Soares do Nascimento.pdf: 1854549 bytes, checksum: 599702a42b67bce2e9c182b8cc815b48 (MD5) / Made available in DSpace on 2015-03-21T13:51:44Z (GMT). No. of bitstreams: 1 Jaqueline Soares do Nascimento.pdf: 1854549 bytes, checksum: 599702a42b67bce2e9c182b8cc815b48 (MD5) Previous issue date: 2013-02-22 / CAPES - Coordenação de Aperfeiçoamento de Pessoal de Nível Superior / UNISINOS - Universidade do Vale do Rio dos Sinos / O objetivo desta dissertação é analisar comparativamente as integrações econômicas do Mercosul e da União Monetária Europeia. A metodologia é baseada na análise de estatística descritiva, com dados secundários relacionados à taxa de crescimento, taxa de desemprego, inflação, bem como às taxas de câmbio, no intuito de avaliar o desvio e correlação dessas variáveis nas integrações. De 1999 a 2011, os resultados apontaram significativa volatilidade nas economias do Mercosul e as flutuações observadas na taxa de crescimento, no emprego, preços e taxas de câmbio são minimamente correlacionadas dentro da região do Mercosul, os níveis de correlação no período de 2000 a 2011 foram muito inferiores aos verificados na década de 90. Os resultados indicaram um grau de abertura da economia baixo na União Monetária Europeia e um pouco maior no Mercosul neste mesmo período, o que indica maiores custos em abandonar a política cambial doméstica e ingressar em uma união monetária; a diversificação setorial no ano de 2011 foi verificada tanto nas economias do Mercosul quanto na UME; e a plena mobilidade do fator trabalho ainda é uma realidade distante para as integrações econômicas diante da baixa mobilidade na União Monetária Europeia e redução do percentual de migrantes intra sul-americanos no bloco latino. O Mercosul apresentou nítidos retrocessos quanto as excessivas medidas restritivas adotadas pelos países participantes e a dificuldade em implementar a livre circulação de bens e serviços entre os países. Na UME, a rigor os critérios de convergência não tem sido sistematicamente cumpridos pelos países aderentes à unificação monetária no ano de seu ingresso e essa flexibilização no que tange a convergência monetária da integração europeia permanece no período recente, pois as economias europeias ainda não conseguiram se recuperar. / The main goal of this master dissertation is analyzing the economical integration between Mercosur and European Monetary Union. The methodology selected is descriptive statistics using secondary data, which are related to growth rate, unemployment rate, inflation as well as exchange rate in order to evaluate the deviation and correlation among these variables in the economical integration. From 1999 to 2011 the results have shown significantly volatility in the Mercosur’s economies. The observed flotation on growth rate, employment, prices as well as exchange rates were minimally correlated within Mercosur’s region and the correlation level from 2000 to 2011 were lower than the nineties. The results indicated a lower grade of economic openness in the European Union and slightly better in the Mercosur during 2000- 2011 period, indicating higher costs to abandon the domestic cambial policy and commence in a monetary union; the sectorial diversification in 2011 was verified in both economies and the full labor mobility still is a distant reality for economic integration considering the lower mobility presented by European Union and the reduction of South American immigrants in the Latin bloc. The Mercosur has presented regression regarding restrictive measures adopted by the participating countries and the obstacles to implement the free circulation of goods and services among the countries. In the European Union, the convergence criteria have not been systematically fulfilled bythe countries, which adhered the monetary unification in the year of their admission. This flexibility in the monetary convergence in the European Union remains until nowadays, because the European economies could not retrieve from the financial crisis.

A adoção de uma moeda única por diferentes países muda significativamente a política econômica desses países. O objetivo desta dissertação, elaborada em forma de artigo, é estudar os efeitos da adoção do euro sobre a competitividade internacional dos países-membros da União Monetária Europeia (UME) com base no arcabouço teórico da teoria das áreas monetárias ótimas. A análise econométrica irá compreender um painel dinâmico com 12 países da UME nos períodos de 2002 a 2013 para inferir se a entrada de capitais teve impacto negativo na competitividade externa dos países periféricos da UME e como que os diferentes tipos de capitais interferiram sobre a taxa de câmbio real efetiva dos países da Zona do Euro. Conclui-se assim que não só a crise é capaz de permitir ganhos de competitividade entre os países da UME, como outros fatores mais desejáveis também, tal como a entrada de outros investimentos da conta financeira do balanço de pagamentos, a abertura comercial e os gastos do governo. Além disso, constata-se que o impacto da mobilidade de capital na competitividade é influenciado não só pelo tipo de capital como também pelo país que recebe esse fluxo. / Adopting a single currency in different countries changes significantly the economic policy of these countries. The objective of this dissertation, prepared in the form of an article is to study the effects of the adoption of the euro on the external competitiveness of member countries of the European Monetary Union (EMU) based on the theoretical framework of the theory of optimum currency areas. The econometric analysis will comprise a dynamic panel with 12 countries of the EMU in the period 2002-2013 to infer if the capital inflow had a negative impact on the external competitiveness of the peripheral countries of the EMU and how different types of capital flows interfered on the real effective exchange rate of the countries of the euro zone. It is therefore concluded that not only the crisis can allow gains in competitiveness between countries in the EMU, as more desirable factors as well, like the inflow of other investments of the financial account of the balance of payments, trade liberalization and government expenditures. In addition, it appears that the capital flows impact on competitiveness is influenced not only by the type of capital but also by the country that receives the flow.

A adoção de uma moeda única por diferentes países muda significativamente a política econômica desses países. O objetivo desta dissertação, elaborada em forma de artigo, é estudar os efeitos da adoção do euro sobre a competitividade internacional dos países-membros da União Monetária Europeia (UME) com base no arcabouço teórico da teoria das áreas monetárias ótimas. A análise econométrica irá compreender um painel dinâmico com 12 países da UME nos períodos de 2002 a 2013 para inferir se a entrada de capitais teve impacto negativo na competitividade externa dos países periféricos da UME e como que os diferentes tipos de capitais interferiram sobre a taxa de câmbio real efetiva dos países da Zona do Euro. Conclui-se assim que não só a crise é capaz de permitir ganhos de competitividade entre os países da UME, como outros fatores mais desejáveis também, tal como a entrada de outros investimentos da conta financeira do balanço de pagamentos, a abertura comercial e os gastos do governo. Além disso, constata-se que o impacto da mobilidade de capital na competitividade é influenciado não só pelo tipo de capital como também pelo país que recebe esse fluxo. / Adopting a single currency in different countries changes significantly the economic policy of these countries. The objective of this dissertation, prepared in the form of an article is to study the effects of the adoption of the euro on the external competitiveness of member countries of the European Monetary Union (EMU) based on the theoretical framework of the theory of optimum currency areas. The econometric analysis will comprise a dynamic panel with 12 countries of the EMU in the period 2002-2013 to infer if the capital inflow had a negative impact on the external competitiveness of the peripheral countries of the EMU and how different types of capital flows interfered on the real effective exchange rate of the countries of the euro zone. It is therefore concluded that not only the crisis can allow gains in competitiveness between countries in the EMU, as more desirable factors as well, like the inflow of other investments of the financial account of the balance of payments, trade liberalization and government expenditures. In addition, it appears that the capital flows impact on competitiveness is influenced not only by the type of capital but also by the country that receives the flow.

A adoção de uma moeda única por diferentes países muda significativamente a política econômica desses países. O objetivo desta dissertação, elaborada em forma de artigo, é estudar os efeitos da adoção do euro sobre a competitividade internacional dos países-membros da União Monetária Europeia (UME) com base no arcabouço teórico da teoria das áreas monetárias ótimas. A análise econométrica irá compreender um painel dinâmico com 12 países da UME nos períodos de 2002 a 2013 para inferir se a entrada de capitais teve impacto negativo na competitividade externa dos países periféricos da UME e como que os diferentes tipos de capitais interferiram sobre a taxa de câmbio real efetiva dos países da Zona do Euro. Conclui-se assim que não só a crise é capaz de permitir ganhos de competitividade entre os países da UME, como outros fatores mais desejáveis também, tal como a entrada de outros investimentos da conta financeira do balanço de pagamentos, a abertura comercial e os gastos do governo. Além disso, constata-se que o impacto da mobilidade de capital na competitividade é influenciado não só pelo tipo de capital como também pelo país que recebe esse fluxo. / Adopting a single currency in different countries changes significantly the economic policy of these countries. The objective of this dissertation, prepared in the form of an article is to study the effects of the adoption of the euro on the external competitiveness of member countries of the European Monetary Union (EMU) based on the theoretical framework of the theory of optimum currency areas. The econometric analysis will comprise a dynamic panel with 12 countries of the EMU in the period 2002-2013 to infer if the capital inflow had a negative impact on the external competitiveness of the peripheral countries of the EMU and how different types of capital flows interfered on the real effective exchange rate of the countries of the euro zone. It is therefore concluded that not only the crisis can allow gains in competitiveness between countries in the EMU, as more desirable factors as well, like the inflow of other investments of the financial account of the balance of payments, trade liberalization and government expenditures. In addition, it appears that the capital flows impact on competitiveness is influenced not only by the type of capital but also by the country that receives the flow.

The submitted thesis focuses on the Economic and Monetary Union and its stability or instability with respect to theory of optimal currency areas. The aim of the thesis is to evaluate whether the current euro area is the optimal currency area, what possible ways of reducing the costs of the common currency exist and what are the economic consequences of a potential breakdown of the Economic and Monetary Union. The analysis of the theory of optimal currency areas is the subject of the first part of this thesis and its criteria are evaluated in the second part. The second part then deals with the economic implications of this theory in practice.