No. 187 - Rating the EC as an Optimal Currency Area

The viability of EMU has been questioned on the grounds that the loss of the exchange rate instrument is not compensated by the availability of alternative adjustment policies. This paper aims to assemble evidence on this issue taking the US as reference. The following indications emerge. Firstly, the economies of the EC countries are more homogeneous than those of the US states and therefore less likely to experience asymmetric disturbances. Secondly, the exchange rate instrument is less efficient in the EC, because of the higher real wage rigidity and the scarce labour mobility within the EC states. Finally, different budgetary tools are available in the EC and in the US to ease adjustment in the face of asymmetric shocks.