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Is Europe an Optimum Currency Area? Business Cyc1es in the EU

Author

Listed:
  • Maria Caporale, Guglielmo

    (University of East London)

  • Pittis, Nikitas

    (University of Cyprus)

Abstract

This paper aims to assess whether the EU is an optimum currency area (OCA)by examining synchronization of business cycles and long-run outþut linkages in the EU countries. We argue that a necessary condition for the desirability of EMU membership for national economies is that the degree of shocks affecting them should be similar. Given the low power of unit root tests, we measure the relative importance of permanent versus transitory component in output. The existence of a "European business cycle" is confirmed by correlation and cointegration analysis respectively. Finally, it appears that monetary coordination, by reducing exchange rate volatili, results more synchronised cycles. EMU is therefore likely to be a successful experience, since the benefits of monetary integration will outweigh the costs of surrendering the exchange rate instrument.

Suggested Citation

  • Maria Caporale, Guglielmo & Pittis, Nikitas, 1999. "Is Europe an Optimum Currency Area? Business Cyc1es in the EU," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 14, pages 169-202.
    • Handle: RePEc:ris:integr:0102
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    Citations

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    Cited by:

    1. Beckmann, Rainer & Hebler, Martin & Kösters, Wim & Neimke, Markus, 2000. "Theoretische Konzepte zum Europäischen Integrationsprozeß: Ein aktueller Überblick [Theoretical concepts for the process of European integration: A current overview]," MPRA Paper 35703, University Library of Munich, Germany.
    2. Attila Csajbók (ed.) & Ágnes Csermely (ed.), 2002. "Adopting the euro in Hungary: expected costs, benefits and timing," MNB Occasional Papers 2002/24, Magyar Nemzeti Bank (Central Bank of Hungary).
    3. Nikolaos Apostolopoulos & Marios Psychalis & Panagiotis Liargovas, 2022. "Discussing EU Policies and Mechanisms towards the COVID-19 Pandemic Crisis: A Case Study of Greece," World, MDPI, vol. 3(4), pages 1-11, October.
    4. João Sousa Andrade & António Portugal Duarte, 2015. "Optimum Currency Areas, Real and Nominal Convergence in the European Union," Notas Econ micas, Faculty of Economics, University of Coimbra, issue 42, pages 8-29, December.
    5. Ansgar Belke & Jens Heine, 2006. "Specialisation patterns and the synchronicity of regional employment cycles in Europe," International Economics and Economic Policy, Springer, vol. 3(2), pages 91-104, November.
    6. Ansgar Belke & Jens Heine, 2007. "On the endogeneity of an exogenous OCA-criterion: specialisation and the correlation of regional business cycles in Europe," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 34(1), pages 15-44, March.
    7. João Sousa Andrade & António Portugal Duarte, 2015. "Optimum Currency Areas, Real and Nominal Convergence in the European Union," Notas Económicas, Faculty of Economics, University of Coimbra, issue 42, pages 8-29, December.

    More about this item

    Keywords

    optimum currency areas; economic and monetary union (EMU); output fluctuations; permanent and transitory shocks;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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