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Optimum currency area theory

Optimum currency area theory adopts the presumption that a currency area confers microeconomic benefits upon its members by eliminating exchange rate risks and reducing transactions costs. Its analysis concerns the extent to which those benefits are offset by macroeconomic costs arising from the necessary sacrifice of national control over monetary policy, such as the cost of the additional unemployment that may be expected to result from that sacrifice when there is an economic downturn. The term "optimum currency area" is believed to have been coined by the eminent economist Robert Mundell to denote the theoretical concept an area within which there is no such offset. Mundel's analysis demonstrated that a sufficient condition for its definition would be would be either a frictionless migration of labour, or a frictionless adaptation of labour costs, in response to a change in demand.