Optimum currency area theory: A study on the harmony of Turkey's Euro Area

Optimum currency area is the area where the benefits of monetary union is exceeding the damage. Mundell, one of the pioneers of the Theory of Optimum Currency Areas, argued that exchange rate regime adopted should ensure the external balance without causing inflation and unemployment for optimum monetary area. The aim of this study, to investigate whether Turkey is compatible with the euro area within the framework of the theory of optimum currency areas. In this respect, GDP growth rate for the years of 1990-2010, unemployment rates, the banking sector loans and the banking sector and the non-refundable troubled loans of the banking sector has been used. Firstly the variables were passed from Hodrick-Prescott filter for eliminating from trend later correlation analysis was performed with a degree of bilateral relations between the variables to measure compliance with business cycles. According to the results although there isn?t a strong bilateral relationship between the variables Turkey's compliance with the euro area showed a weak trend. Soon not to join of Turkey the euro area may be in it?s favor.