Is the UK Sterling-Zone an Optimal Currency Area? Comparisons with the Euro Area and the Rest of Europe Using City and Regional Investment Data

In this paper we use detailed data on the capital risk-pricing of large-scale UK and European real estate investments to capture the extent to which the UK Sterling-area, the Eurozone, and the non-Euro parts of the EU, correspond to Mundell’s (1961) original notion of an optimal currency area (OCA). Financial capital is the most geographically mobile factor, and the factor input which can respond most rapidly, and move most quickly, towards equilibrating adjustments in response economic shocks. As such, observations of how capital prices adapt to shocks across different city, regional, national, and pan-national geographies provide a powerful test of the OCA logic in a manner which is consistent with Mundell’s (1961) original arguments. In particular, our analysis spans the shocks associated with the 2008 global financial crisis. Our results suggest that in the post-crisis era, the Sterling-area is less of an optimal currency area than either the Eurozone or the non-Euro parts of the EU. This also helps to explain why in the post-crisis era, UK monetary policy, and in particular quantitative easing (QE), appears to have had no real beneficial traction outside of the London area.