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Are Optimum Currency Area (OCA) Theory Criteria Endogenous to Regime Change? The Case of the European Monetary Union (EMU) Before and After 1999

This paper aims to establish whether or not the Optimum Currency Area (OCA) theory criteria are endogenous to regime change after 1999. Using the eleven EMU countries and the UK and US, I sub-divide the time period into two – the ten years before monetary union and the ten years after. I then perform three tasks; a multivariate cointegration approach to analyze trade balance performances following an exchange rate depreciation; impulse response functions to analyze the absorption properties of the exchange rates from demand, supply and monetary shocks; variance decompositions to analyze the contribution of the these shocks to the movement in the exchange rate. I find that overall, the Optimum Currency Area (OCA) theory criteria are endogenous to regime change and the euro-based but country-adjusted nominal effective exchange rates are a more effective shock-absorbing variable in the period after 1999 than before when the nominal effective exchange rates were based on national currencies.