Advanced Search
MyIDEAS: Login to save this paper or follow this series

Optimum Currency Areas and Shock Asymmetry: A Comparison of Europe and the United States

Contents:

Author Info

  • Nick Chamie (Bank of Canada),

    (Bank of Canada)

  • Alain DeSerres (Bank of Canada),

    (Bank of Canada)

  • Rene Lalonde (Bank of Canada)

    (Bank of Canada)

Registered author(s):

    Abstract

    The authors examine the optimality of the European Monetary Union (EMU) by estimating the degree of asymmetry in shocks affecting thirteen European countries and comparing the results to those obtained for nine U.S. regions. First, they identify supply shocks and real and nominal demand shocks by imposing restrictions on the long-term effects of these on the level of output, prices and money. This decomposition is necessary to develop a measure of shock asymmetry that is not affected by country-specific monetary policy disturbances. Next, the unobservable common and specific components of structural shocks are identified by means of state-space models. The results show that both supply and real demand shocks affecting the regions of the United States are much more symmetrical than those affecting the European countries. In Europe, only Germany and Switzerland are strongly related to the symmetrical component of shocks. The fact that Greece, Italy, Norway, Portugal and Sweden are not statistically related to the common component of the shocks suggests that they may face significant adjustment costs by participating in the European Monetary Union. However, these countries appear to be characterized by a smaller degree of nominal rigidity, which could partly offset the impact of asymmetrical shock by facilitating the adjustment. Shocks affecting France, Belgium, the Netherlands, the United Kingdom and Spain are largely asymmetrical, though statistically related to the common components. Les auteurs examinent l'optimalite de l'Union Monetaire Europeenne (UME) en partant d'une evaluation empirique du degre d'asymetrie des chocs d'offre et de demande auxquels sont soumis treize pays d'Europe et en comparant les resultats avec ceux qu'ils ont obtenus pour neuf regions des Etats-Unis. Dans un premier temps, ils identifient les chocs d'offre ainsi que les chocs de demande reels et nominaux a l'aide de restrictions imposees aux effets que ces chocs peuvent avoir a long terme sur le niveau de la production, des prix et des encaisses reelles. Cette operation est necessaire pour obtenir une mesure des chocs asymetriques qui ne soit pas affectee par les effets de la politique monetaire specifique de chaque pays. Dans un deuxieme temps, les auteurs determinent les composantes inobservables communes et specifiques des chocs structurels en utilisant des modeles d'espace-d'etat. Les resultats montrent que les chocs d'offre et de demande reels affectant les regions americaines sont dans l'ensemble plus symetriques que ceux qu'enregistrent les pays europeens. En Europe, seuls les chocs affectant l'Allemagne et la Suisse sont fortement associes a la composante symetrique. Le fait que les chocs auxquels sont soumis la Grece, l'Italie, la Norvege, le Portugal et la Suede ne soient pas relies statistiquement a la composante commune indique que ces pays pourraient faire face a d'importants couts d'ajustement en adherant a l'UME. Toutefois, ils semblent caracterises par un degre de rigidites nominales plus faible, ce qui pourrait faciliter leur ajustement a un choc asymetrique. Les chocs touchant la France, la Belgique, les Pays-Bas, le Royaume-Uni et l'Espagne sont largement asymetriques, quoique statistiquement rattaches a la composante commune.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/04/wp94-1.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by Bank of Canada in its series Working Papers with number 94-1.

    as in new window
    Length:
    Date of creation:
    Date of revision:
    Handle: RePEc:bca:bocawp:94-1

    Contact details of provider:
    Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada
    Phone: 613 782-8845
    Fax: 613 782-8874
    Web page: http://www.bank-banque-canada.ca/

    Related research

    Keywords:

    This paper has been announced in the following NEP Reports:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Amano, R. A. & van Norden, S., 1998. "Oil prices and the rise and fall of the US real exchange rate," Journal of International Money and Finance, Elsevier, Elsevier, vol. 17(2), pages 299-316, April.
    2. Wirjanto, T.S. & Amano, R.A., 1993. "The Dynamic Demand for Money in Germany, Japan and the United Kingdom," Working Papers 9314, University of Waterloo, Department of Economics.
    3. Lafrance, Robert & St-Amant, Pierre, 2000. "Les zones monétaires optimales," L'Actualité Economique, Société Canadienne de Science Economique, Société Canadienne de Science Economique, vol. 76(4), pages 577-612, décembre.
    4. Simon van Norden & Huntley Schaller & ), 1995. "Speculative Behaviour, Regime-Switching, and Stock Market Crashes," Econometrics, EconWPA 9502003, EconWPA.
    5. P Clark & D Laxton, 1997. "Phillips Curves," CEP Discussion Papers dp0344, Centre for Economic Performance, LSE.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Benigno, Pierpaolo, 2001. "Optimal Monetary Policy in a Currency Area," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2755, C.E.P.R. Discussion Papers.
    2. Jean-Pierre Allegret & Alain Sand, 2007. "Modeling the impact of real and financial shocks on Mercosur: the role of the exchange rate regime," Working Papers, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure 0701, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
    3. Laurence Boone, 1997. "Symmetry and Asymmetry of Supply and Demand Shocks in the European Union," Working Papers 1997-03, CEPII research center.
    4. Fidrmuc, Jarko & Korhonen, Iikka, 2004. "A meta-analysis of business cycle correlation between the euro area and CEECs: What do we know – and who cares?," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 20/2004, Bank of Finland, Institute for Economies in Transition.
    5. Murray, John, 2000. "Why Canada needs a flexible exchange rate," The North American Journal of Economics and Finance, Elsevier, vol. 11(1), pages 41-60, August.
    6. Lionel Fontagné & Michael Freudenberg, 1999. "Endogenous Symmetry of Shocks in a Monetary Union," Open Economies Review, Springer, Springer, vol. 10(3), pages 263-287, July.
    7. Jean-Pierre Allegret & Alain Sand-Zantman, 2006. "Disentangling business cycles and macroeconomic policy in Mercosur: a VAR and unobserved components model approaches," Post-Print halshs-00134317, HAL.
    8. Chrigui Zouhair & Boujelbene Younes, 2009. "The Opportunities for Adopting Inflation Targeting in Tunisia: a Cointegration Study and Transmission Channels of Monetary Policy," Transition Studies Review, Springer, vol. 16(3), pages 671-692, October.
    9. Raoul Lättemäe, 2003. "EMU Accession Issues in Baltic Countries," Eastward Enlargement of the Euro-zone Working Papers wp17a, Free University Berlin, Jean Monnet Centre of Excellence, revised 01 May 2003.
    10. Igor Veličkovski & Aleksandar Stojkov, 2014. "Is the European integration speeding up the economic convergence process of the Central and South-Eastern European countries? A shock perspective," Empirica, Springer, Springer, vol. 41(2), pages 287-321, May.
    11. Hassapis, Christis & Pittis, Nikitas & Prodromidis, Kyprianos, 1999. "Unit roots and Granger causality in the EMS interest rates: the German Dominance Hypothesis revisited," Journal of International Money and Finance, Elsevier, Elsevier, vol. 18(1), pages 47-73, January.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:bca:bocawp:94-1. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.