Assessing a perfect European optimum currency area: a common cycles approach

In this paper we introduce a new definition for an optimum currency area (OCA) which is more restrictive than the previous ones. Indeed, using both a cointegration and a common cyclical feature analysis in a VAR (p) framework, a set of countries is said to constitute a perfect OCA if the short-run dynamics is perfectly correlated while long-run relationships are not constrained. Using seasonally unadjusted industrial production indices for the period 75:M1 to 97:M4, we show that European countries are not sufficiently related to fit our definition.