Wednesday, May 31, 2017

California is not part of any optimal currency zone

Is the United States Becoming Less of an Optimal Currency Area?

It took the United States roughly 150 years to become an optimal currency area (OCA), according to economic historian Hugh Rockoff. This long journey meant that it was not until the late 1930s that a one-size-fits-all monetary policy made sense for the U.S. economy. Since then the U.S. economy has often been held up as the best example of a currency union that meets the OCA criteria. This especially was the case when comparisons have been made to the Eurozone, like in this classic Blanchard and Katz (1992) paper.  But all is not well in this land of the OCA.

Note, the historian referenced says we were not an optimal currency zone until the California dust bowl  migration.  And now we are not an optimum currency zone because California is too big and run by unions.  Look at unemployment:

The last three recessions, starting in California and ending in California.  California and its interaction with the federal government is the synchronization point for recessions.  So, large, new federal programs always coincide with major disruptions in Cal government programs, causing recessions.

What can California do?

Not much, the sandbox will fix the problem, as the sandbox will automatically organize transactions by similarity, thus the optimal currency zone and sandbox are synonymous. Also, the sandbox has free entry and exit. So OCA is not an issue, especially since the central bankers will be competing with different monetary standards.

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