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The Endogeneity of Optimum Currency Areas Criteria: Some Evidence from the European Union and Portugal

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  • João Silvestre

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  • António Mendonça

    ()

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    Abstract

    Observing the statistical relationship between business cycles correlation and trade intensity in the European Union, euro zone, and the Portuguese economy, we conclude that there is, in general, a positive effect that supports the endogeneity argument proposed by Frankel and Rose (The Economic Journal 108(449):pp. 1009–1025, 1998 ). However, if we analyse this relationship in sub-periods – 1967–1975, 1976–1985, 1986–1992, and 1993–2003 – we conclude that endogeneity hypothesis just hold in the first two, although the correlations are increasing. This could mean that, after the Single European Act in 1986, other forces beyond trade are contributing to business cycle synchronization. The Portuguese business cycle correlation with the European Union and the Euro zone had also increased in these four decades, despite the fact that endogeneity hypothesis is at a 90 percent confidence level. We also analyse the bilateral relationships between the Portuguese economy and the other European Union countries and find that the endogeneity is confirmed in just four cases: Spain, Ireland, Netherlands, and UK. Copyright International Atlantic Economic Society 2007

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    Bibliographic Info

    Article provided by Springer in its journal International Advances in Economic Research.

    Volume (Year): 13 (2007)
    Issue (Month): 1 (February)
    Pages: 1-18

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    Handle: RePEc:kap:iaecre:v:13:y:2007:i:1:p:1-18

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    Web page: http://www.springerlink.com/link.asp?id=112112

    Related research

    Keywords: economic and monetary union (EMU); business cycles correlation; optimum currency areas; international trade; E32; E42;

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    1. Artis, Michael J & Zhang, W, 1997. "International Business Cycles and the ERM: Is There a European Business Cycle?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 2(1), pages 1-16, January.
    2. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR & CES & MSH, vol. 15(30), pages 7-46, 04.
    3. Mongelli, Francesco Paolo, 2002. ""New" views on the optimum currency area theory: what is EMU telling us?," Working Paper Series 0138, European Central Bank.
    4. Giancarlo Corsetti & Paolo Pesenti, 2002. "Self-validating optimum currency areas," Staff Reports 152, Federal Reserve Bank of New York.
    5. Rose, Andrew K, 2003. "A Meta-Analysis of the Effect of Common Currencies on International Trade," CEPR Discussion Papers 4341, C.E.P.R. Discussion Papers.
    6. Peter B. Kenen, 2000. "Currency areas, policy domains, and the institutionalization of fixed exchange rates," LSE Research Online Documents on Economics 20170, London School of Economics and Political Science, LSE Library.
    7. Frankel, Jeffrey A & Rose, Andrew K, 1996. "The Endogeneity of the Optimum Currency Area Criteria," CEPR Discussion Papers 1473, C.E.P.R. Discussion Papers.
    8. De Grauwe, Paul & Vanhaverbeke, Wim, 1991. "Is Europe an Optimum Currency Area? Evidence from Regional Data," CEPR Discussion Papers 555, C.E.P.R. Discussion Papers.
    9. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
    10. Ian Babetskii, 2004. "EU Enlargement and Endogeneity of some OCA Criteria: Evidence from the CEECs," Working Papers 2004/02, Czech National Bank, Research Department.
    11. Michael Artis, 2003. "Is there a European Business Cycle?," CESifo Working Paper Series 1053, CESifo Group Munich.
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    Cited by:
    1. Balogun, Emmanuel Dele, 2007. "Effects of exchange rate policy on bilateral export trade of WAMZ countries," MPRA Paper 6234, University Library of Munich, Germany.
    2. João Silvestre & António Mendonça & José Passos, 2007. "The Shrinking Endogeneity of Optimum Currency Areas Criteria: Evidence from the European Monetary Union – A Beta Regression Approach," Working Papers Department of Economics 2007/22, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
    3. Balogun, Emmanuel Dele, 2008. "An alternative reconsideration of macroeconomic convergence criteria for West African Monetary Zone," MPRA Paper 11367, University Library of Munich, Germany.
    4. João Rebelo Barbosa & Rui Henrique Alves, 2011. "The Euro Area Ten Years after Its Creation: (Divergent) Competitiveness and the Optimum Currency Area Theory," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 58(5), pages 605-629, December.

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