Spanish regions and the macroeconomic benefits of the European Monetary Union

This paper empirically examines the extent to which regions within the same country differ in their exposure to a common currency. We estimate an Optimum Currency Areas (OCA) index based on the main theoretical macroeconomic determinants. We use data from the Spanish regions for the period 1992-98 and Germany is taken as a numeraire. Results allow us to forecast whether sharing the same currency is equally suitable for regions differing in the relevant OCA determinants despite being equally exposed to national specific shocks. The results suggest three main findings. First, relatively large, more diversified and open regions are best prepared to share the same currency. Second, real exchange rate differs significantly between Spanish regions although these differences remain smaller than those between countries. Third, whereas at the regional level the degree of synchronization with the European Union (EU) business cycle is strongly associated with the OCA index, differences in fiscal performance and the unemployment rate were poor predictors of monetary integration.