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Convergence of shocks and trade in the enlarged European Union

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  • Athina Zervoyianni
  • Athanasios Anastasiou
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    Abstract

    This paper explores the relation between trade flows and cross-country symmetry of supply and demand shocks using data from the EU-27 countries. Increased bilateral trade intensity is found to have a positive impact on the correlation of both demand and supply shocks. Intra-industry trade is found to be positively linked to correlations of supply-side shocks but negatively linked to correlations of demand shocks. Our results thus provide support for the argument that aggregate demand spillovers and intra-industry trade, rather than specialization, dominate in the process through which trade flows affect the cross-country transmission of shocks in Europe. At the same time, our estimates suggest that monetary-policy convergence in Europe (the circulation of the euro), while having increased symmetry of supply-side shocks, has had no direct favourable impact on symmetry of demand shocks. By contrast, the process of fiscal-policy convergence is found to have resulted in more correlated demand shocks across the EU member states.

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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal The Journal of International Trade & Economic Development.

    Volume (Year): 18 (2009)
    Issue (Month): 1 ()
    Pages: 79-114

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    Handle: RePEc:taf:jitecd:v:18:y:2009:i:1:p:79-114

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    Related research

    Keywords: trade flows; convergence of shocks; European integration; cyclical macroeconomic fluctuations;

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