THE THEORETICAL ASPECTS OF THE COMMON CURRENCY ADOPTION IN LITHUANIA

Abstract

Monetary integration is a key prerequisite for the optimal recourses allocation inside the economic union. Recent EU economic cycle harmonization and interdependent trade tends to monetary integration and shows its real benefi t.
In case of the common currency adoption Lithuania has to meet Maastricht criterion and the latter condition is core. However in economic regard so called unoffi cial criterions of real convergence are enough weighty. Real convergence criterion base is the optimum currency area (OCA) theory. A currency area adopts a single currency within its area and maintains a fl exible rate regime with the rest of the world. An OCA theory has been implicitly defi ned by Mundell in 1961 as a currency area for which the costs of relinquishing the exchange rate as an internal instrument of adjustment are outweighed by the benefi ts of adopting a single currency. Specifi cally the OCA index assesses structural similarity between investigative country economy and other country or region. OCA theory in general focuses on four inter-relationships between the members of a potential OCA: the extent of trade, the similarity of the shocks and cycles, the degree of labor mobility and the system of risk-sharing, usually through fi scal transfers. The greater any of the four linkages between the Euro zone and Lithuania, the more suitable a common currency.
Alternative tool providing the analysis of real convergence is the Theil inequality index which enables to measure the degree to which country’s macroeconomic element (GDP, infl ation, current account fl uctuations and others) differs from another country.