Optimum Currency Area: the case of the EMU and Turkey

The thesis concerns the issues related to the Optimum Currency Area (OCA) theory and its application to the European Monetary Union (EMU) and the Republic of Turkey. To be specific, the Optimum Currency Area (OCA) criteria were discussed in detail and then analysed from the view point of Turkish economy`s preparedness to fulfill the real convergence requirements. The Maastricht nominal criteria were assessed as well. The business cycle synchronization, openness to trade and specialization criteria were chosen to evaluate the degree of Turkey`s integration with the European Monetary Union`s member states, particularly with Austria, Belgium, France, Germany and the Netherlands, which are considered as the “core” of the single currency area. The Hodrick-Prescott filter was used to detrend the industrial production series and then calculate the cross-correlation of the cyclical components of production series which are a measure of countries`s business cycles co-movements. To analyze openness to trade index, the ratio of bilateral trade over a country`s Gross Domestic Product (GDP) was calculated. As regards the industry specialization criterion, it was computed as the sum of squared ratios of export for each product group over a country`s total exports. Organization for Economic Co-operation and Development (OECD), World Integrated Trade Solution (WITS), Eurostat, International Monetary Fund (IMF), European Central Bank (ECB) databases were used for data collection.After the assessment of both nominal and real convergence criteria, it was concluded that the Republic of Turkey did not fulfill the Maastricht nominal criteria over a period 2010-2017, whereas the OCA criteria observed were partially met as there was found a strong and statistically significant cross-correlation of Turkish and German business cycles. Germany was used as a benchmark for evaluation purposes.