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The study evaluates the feasibility of BRICS (Brazil, Russia, India, China, and South Africa) countries to form an Optimum Currency Area (OCA) through the analysis of shock correlation within the OCA framework. Employing a structural vector auto regression (SVAR) model proposed by Blanchard and Quah, the analysis encompasses both external and domestic shocks affecting individual countries. The study employs four variables: world real GDP, domestic real GDP as a proxy for output, the real effective exchange rate, and the inflation rate as a proxy for price level, to estimate the shocks. Subsequent analysis includes ANOVA, impulse response function (IRF), and variance decomposition to discern shock magnitudes, adjustment dynamics, and underlying determinants of variability. Empirical results show that BRICS countries display symmetric responses to external shock, however, with overall different sources of variation in the responses to domestic supply, demand, and monetary shocks. The results of the analysis using the ANOVA test, IRF, and variance decomposition also highlight the nuanced disparities across BRICS countries in terms of demand, and monetary shocks, indicative of differences in transmission mechanisms and policy responses. The study underscores the implication of aligning exchange rate mechanisms and monetary policies in facilitating the convergence of shock levels, thereby fostering economic stability among BRICS countries. This study provides a critical analysis of the feasibility of BRICS countries forming an Optimum Currency Area (OCA) through the application of Structural Vector Auto Regression (SVAR) modeling. By analyzing the correlation and dynamics of both external and domestic macroeconomic shocks, the research highlights significant disparities in how these shocks affect BRICS countries. Despite these differences, the study identifies a strong symmetric response to external shocks. These findings underscore the challenges of aligning exchange rate mechanisms and monetary policies among these diverse economies, yet also reveal the potential for economic stability through coordinated policy responses to symmetric external shocks. This work is pivotal in informing policy decisions on deeper economic integration within the BRICS bloc. It also suggests that with careful policy design, particularly focusing on strengthening economic interdependencies and mitigating asymmetric shock, the BRICS bloc could enhance its economic stability and global influence. Therefore, the study also offers valuable insights into the feasibility of a common currency or enhanced economic integration for emerging economies considering monetary unions in a complex global financial landscape. The study's recommendations provide a roadmap for BRICS countries to navigate the complexities of economic integration, making it a significant contribution to the field of international economics and regional development strategies.

We take stock of the history of the European Monetary Union and pegged exchange-rate regimes in recent decades. The post-Bretton Woods greater financial integration and under-regulated financial intermediation have increased the cost of sustaining a currency area and other forms of fixed exchange-rate regimes. Financial crises illustrated that fast-moving asymmetric financial shocks interacting with real distortions pose a grave threat to the stability of currency areas and fixed exchange-rate regimes. Members of a currency union with closer financial links may accumulate asymmetric balance-sheet exposure over time, becoming more susceptible to sudden-stop crises. In a phase of deepening financial ties, countries may end up with more correlated business cycles. Down the road, debtor countries that rely on financial inflows to fund structural imbalances may be exposed to devastating sudden-stop crises, subsequently reducing the correlation of business cycles between currency area’s members, possibly ceasing the gains from membership in a currency union. A currency union of developing countries anchored to a leading global currency stabilizes inflation at a cost of inhibiting the use of monetary policy to deal with real and financial shocks. Currency unions with low financial depth and low financial integration of its members may be more stable at a cost of inhibiting the growth of sectors depending on bank funding.

Recent developments in the monetary situation in West Africa, in particular the transformation for the CFA franc area and the project to build a single currency for the CEDEAO/ECOWAS, require a systematic review of the assumptions underlying the formation of monetary unions. The article provides a critical review of the traditional theoretical foundations of optimal currency areas (OCAs) and their subsequent amendments, in light of the problems that emerged in the most relevant monetary unions. On specific points, a comparison is made between the eurozone and the CFA zone. The article then investigates the specific characteristics of the monetary area affected by the reform project, and finally it indicates the main lines along which the project of a common currency to all the states that currently make up the CEDEAO/ECOWAS could evolve, identifying four possible alternative roadmaps.

Prospects for the European Monetary Union are inevitably affected by the theoretical presuppositions of the observer. The most common approach, the theory of optimal currency areas, postulates that traded goods are produced by labour and the exchange rate between 'national' currencies is the ratio of commodity wages, expressed in monetary units, in different countries. In this analysis the exchange rate and wages are substitutes for obtaining international 'competitiveness'. Such a view is the basis for current reflections about the future of the euro and the reduction of its difficulties to relative wages rates in different countries of the eurozone. The theory has two important limitations. First, it takes no account of the import intensity of exports, which would require wage adjustments to reinforce exchange rate adjustments, so that wages and exchange rates are necessarily complementary parameters, rather than being substitutes for each other. Hence, exit from the eurozone as a means of closing trade deficits would require additional austerity. Even more importantly, it is a commodity money theory, in which imbalances are accommodated by accumulations of specie or fiat money. However, in a credit economy, banking systems absorb trade imbalances into their balance sheets. Moreover, financial integration means that banking systems throughout Europe are vulnerable to balance sheet risks from exchange rate depreciation in any country in Europe.

This paper presents a new rationalization for bailouts of sovereign debt in monetary unions, such as those observed during the recent Euro crisis. It introduces a model where member countries of the monetary union are ex-ante identical, and each derives utility from consumption and disutility from the union-wide inflation rate. The union’s central bank is utilitarian and lacks commitment. Countries borrow or save in a market for nominal sovereign debt in response to idiosyncratic income shocks, with countries that receive positive income shocks saving and countries that receive negative income shocks borrowing. Ex post, the monetary union’s central bank will attempt to devalue sovereign debt through surprise inflation, as this will redistribute income from rich creditor countries to poor debtor countries. Creditor countries choose to bailout debtor countries because bailouts will weaken the redistributive motives of the central bank and forestall surprise inflation. As bailouts in this environment constitute a payment from lucky creditor countries to unlucky debtor countries, they mimic a risk-sharing arrangement that insures against income shocks. The payments made by creditor countries are incentive-compatible due to the shared currency and inflation rate in the monetary union. This ability of countries to provide each other with incentive-compatible insurance constitutes a novel theory of optimal currency areas. This insurance benefit of the monetary union is largest for countries with negatively correlated income shocks, in contrast to the classic Mundell-Friedman optimal currency area criterion.

So far, empirical research on an ex-post benchmark of the euro adoption has relied on the synthetic control method by Abadie & Gardeazabal (Am Econ Rev 93:112-132, 2003) and Abadie et al. (J Am Stat Assoc 105:493-505, 2010, Am J Polit Sci, 59:495-510, 2015). However, the evidence obtained with this method is not overly consistent, leading to the conclusion that the method is not too robust to different settings of the adjustment screws. Using a new method developed by Harvey & Thiele (J Appl Econ 36:71–85, 2021) based on structural time series models, I find that France and Italy are clear losers from the euro while there are no real winners until 2019. Spain, Netherlands, Greece gain in the period before the financial crisis, but afterwards they lose. In fact, only the German economy is robust to the two crises but it loses until 2008. Relating the theories of optimum currency areas to the estimated gaps of the euro adopters from their synthetic controls, I find that openness, real convergence, and net migration are the main drivers of gains from a euro adoption, while the main drivers of losses are low levels of competitiveness, fiscal instability and labour market rigidity. Examining the crisis channels of the financial and euro crisis shows that fiscal instability, labour market rigidity and also business cycle synchronization cause large losses during the crises. Net migration helps to dampen these shocks. While openness is beneficial during the pre-crises period, it cannot help dampen the shock of the crises.

Our study presents a pioneering bibliometric analysis of optimum currency areas literature and monetary integration, utilising 9,228 research outputs published between 1960 and 2022. We employ the biblioshiny function in R-studio to comprehensively analyse this data. Our findings reveal a growing body of literature on optimum currency areas, with increased author productivity. Remarkably, influential authors, despite their lower research volume, receive extensive citations and publish in prestigious journals such as The Quarterly Journal of Economics and The American Economic Review. Additionally, our analysis exposes a lack of representation from non-European/American institutions, as well as an underrepresentation of female and non-White researchers. We propose future research directions to address these gaps. Notably, our study is the first to conduct a bibliometric analysis on optimum currency areas and monetary integration, highlighting its originality.

Purpose The purpose of this paper is to investigate whether the proposed eco currency union has sufficient business cycle synchronization among its members to avoid problems such as those experienced in the last several years by countries in the eurozone. This monetary union would potentially include 18 countries – Benin, Burkina Faso, Cameroon, Central African Republic, Chad, Republic of the Congo, Cote d’Ivoire, Equatorial Guinea, Gabon, Gambia, Ghana, Guinea, Guinea-Bissau, Mali, Niger, Nigeria, Senegal and Togo – which collectively have a GDP of over 744 billion dollars and a population of over 300 million people. Design/methodology/approach The authors will apply some recently created econometric tools that were developed specifically to investigate business cycle synchronization in the eurozone. These tools – denoted synchronicity and similarity – overcome some of the limitations of previous studies which have used vector autoregressions and suffered simultaneity bias as a result. Findings The different measures employed suggest that the potential members of the eco exhibit a very low level of synchronization. Nigeria in particular, which is heavily dependent on oil, as are some, but not all potential members, would be the largest member, and exhibits a very low level of synchronization with other prospective eco member nations. Finally, preliminary evidence from several countries which have joined the existing African currency unions does not indicate that the act of joining a currency union improves synchronization, and this result contradicts the “endogenous optimal currency area” hypothesis. Research limitations/implications Like previous studies on the topic, the authors rely on the available data. The number of observations is more limited than would be optimal. Practical implications The results would strongly caution against the creation of the eco currency union, as members appear even less ready for monetary integration than countries in the eurozone did. Originality/value This is the first study to apply the synchronicity and similarity tools to the prospective West African eco nations.

PurposeThis paper examines correlations of the underlying structural shocks and the degree of synchronization in the impulse responses of output, inflation and trade to a one standard deviation shock to non-oil commodities price index and exchange rates within the West African Monetary Zone (WAMZ) countries from 1990q1 to 2020q1.Design/methodology/approachThis paper uses the structural vector autoregressive model to isolate the underlying structural shocks and compares them with the West African Monetary Union (WAEMU) countries.FindingsFindings from the study suggest that correlations of underlying structural shocks are more profound in the WAEMU than in the WAMZ. Impulse responses of output to price and exchange rate shocks are more symmetric in the WAEMU than in the WAMZ. However, impulse responses of inflation to price and exchange rate shocks are symmetric in the WAMZ than in the WAEMU and responses of trade in both sub-groups are not uniform.Practical implicationsThe paper concludes that the WAMZ does not constitute an Optimum Currency Area concerning the correlations of the structural shocks and output. However, it has achieved convergence in inflation and there are adequate adjustment mechanisms to shocks in the WAMZ than in the WAEMU. Therefore, the WAMZ may not suffer from joining the monetary union. Thus, economic Community of West African States may take steps to roll out the monetary union.Originality/valueThe paper examines correlations of the underlying structural shocks, impulse responses of output and inflation to shocks to commodities price and exchange rates in the WAMZ and compares them with the WAEMU.

The mobility of factors of production from the very beginnings of the theory of the optimal currency area (OCA) stands out as one of the primary mechanisms for achieving a balance of payments, i.e. sustainability of the monetary union (Mundell criterion). However, there is a significant qualitative difference between the monetary union of countries with similar income levels and the one with different development stages Namely, in the first case, labor mobility, as a rule, has short-term economic effects, while it has a longer-term (more negative) impact – especially on the long-run aggregate supply (LRAS). Many Eastern European countries, which expressed a desire to become part of European integration and the monetary union after the communist ruin, experienced this. In a previous paper, the authors set the thesis about “Impossible Trinity of Developing Countries”. In this paper, the aspiration is to confirm the validity of this theory by analyzing Greece within the period 1999-2020, specifically observing the impact of three variables (fiscal policy, social development level, and level of economic freedom) on the emigration of the population under conditions of monetary union and labor force mobility. The results obtained in this research indicate that the fiscal policy in the observed period was the most significant factor in explaining migration trends. The implications for developing countries that are currently entering (such as Croatia) or intend to enter the monetary union with more developed countries in the future are particularly significant.