Optimum currency area, monetary union and economic shocks an economic analysis on european monetary union and Turkey

This study highlights the economical factors that may have an impact on the outcome of EU-Turkey accession negotiations in the coming years. The main purpose of this present study is to analyze the suitability of Turkey for European Monetary Union by using different methods. The OCA theory, with its many empirical applications, offers a valuable and concise tool to access the costs and benefits of the decision whether a country should join a currency area. Therefore this study reviews significant research on the OCA theory.The results show that it does not make any sense for Turkey to take part in the European Monetary Union. Different methods are used to consider the OCA theory (Panel Data, Structural VAR and Cointegration). The objective of this dıssertation is to analyze the economic developments in European Monetary Union for the period 1980-2004 by showing shocking aspects of European member and candidate countries especially focussing on explaining the financial crises in the EMU. The hypothesis, that are used in this study is as follows: Gıven the economıc shocks, that are faced by the member countries of the EMU, if the structure of the shocks to Turkey is different, Turkey should not be a memeber of the EMU.I consider the incidence of supply and demand shocks in some European Union countries as a way of identifying countries experiencing similar economic disturbances and hence satisfying one of the conditions for initiating an optimum currency area. The research suggests that Turkey does not encounter similar disturbances with other countries. Therefore it can be maintained that Turkey should not join the EMU. It is shown also that the EMU can not be called an Optimum Currency Area because of the differences in economic shocks across its member countries.It will be clearly revealed that the monetary transmission mechanism in Turkey is different than in the EMU. Because of differences in transmission mechanism, one may hold that Turkey should not join the EMU.Finally, I weigh the positive effects of joining the EU. EU membership will bring Turkey access to the significant EU market, increased growth prospects and access to structural funds. But more importantly, Turkey?s EU membership would boost confidence by eliminating the uncertainty associated with political and economic instability.Keywords: Optimum Currency Areas, EMU, Demand and Supply Shocks, Currency Crises, SVAR, Panel Data, Optimum Currency Indexes