[Article] Testing Mundell’s Intuition of Endogenous OCA Theory

Research Economics

This paper presents an empirical assessment of the endogenous optimum currency area theory. Results suggest that economic convergence ensured by belonging to the common currency area helps double FDI flows.

Phanindra V. Wunnava , Hubert P. Janicki , Thierry Warin https://www.warin.ca (HEC Montréal and CIRANO (Canada))https://www.hec.ca/en/profs/thierry.warin.html
02-22-2009

Abstract

This paper presents an empirical assessment of the endogenous optimum currency area theory. Frankel and Rose (1998) study the endogeneity of a currency union through the lens of international trade flows. Our study extends Frankel and Rose’s model by using FDI flows to test the original theory developed by Mundell in 1973. A gravity model is used to empirically assess the effectiveness of the convergence criteria by examining location‐specific advantages that guide multinational investment within the European Union. A fixed effects model based on a panel data of foreign direct investment (FDI) flows within the EU‐15 shows that horizontal investment promotes the diffusion of the production process across the national border. Specifically, our results suggest that economic convergence ensured by belonging to the common currency area helps double FDI flows.


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Citation

For attribution, please cite this work as

Wunnava, et al., "www.warin.ca: [Article] Testing Mundell's Intuition of Endogenous OCA Theory", Review of International Economics, 2009

BibTeX citation

@article{wunnava2009[article],
  author = {Wunnava, Phanindra V. and Janicki, Hubert P. and Warin, Thierry},
  title = {www.warin.ca: [Article] Testing Mundell's Intuition of Endogenous OCA Theory},
  journal = {Review of International Economics},
  year = {2009},
  note = {https://warin.ca/posts/article-testing-mundell/},
  doi = {10.1111/j.1467-9396.2008.00802.x}
}