Endogeneity and Specialization Theories of Optimal Currency Areas

In this master thesis the assumption that the European Monetary Union is an Optimum Currency Area (OCA)is made. The main purpose of the thesis is to evaluate two theories of OCA dynamics for the European case. The means by which this is done is by using Time Series Factor Analysis for identification of a common European business cycle. A comparison between the group of countries that initially signed the Maastricht treaty and the 50 US states is also carried out. Furthermore an index of specialization is calculated for both the European and US states. The results point in the direction of the endogeneity aspect being the most dominant effect so far for the European countries. The analysis of the US states does however suggest that an increasing level of specialization is to be expected for the European countries.