The United States and the Euro Area: What Do Structural Models Say About the Linkages?

The results so far have been based on purely empirical approaches aimed at assessing the degree of co-movement of economic activity across the two sides of the Atlantic. Such approaches however are agnostic on the reasons why certain movements occurred, which hampers their capacity to ascertain the nature and extent of the transmission mechanism from the United States to the euro area. For instance, an equally sized shock to US activity would have a smaller global spillover if caused by a purely US-specific reason, for example, a real estate market boom-bust, than if caused by some global factor, for example, an oil price increase. Among purely domestic shocks also, impacts on the rest of the world will be different depending upon their nature, that is, whether they have a demand or supply origin. For instance, a supply shock — related to the diffusion of a specific technology — will tend to impact more on potential growth than a demand shock, whose effects would be more immediate both in the US and in the rest of the world.