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From the ERM to the Euro: new evidence on economic and policy convergence among EU countries

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Abstract

Skeptic views on EMU are usually cast around three arguments. First, the EU does not satisfy "Optimum Currency Area" (OCA) conditions. Second, heterogeneous economic and financial structures will produce differences in monetary transmission. Third, the shift from domestic to area-wide considerations may give rise to conflicts in the decision making of the European Central Bank (ECB). While we do not address the second of these concerns, we present some evidence that goes in the direction of mitigating the first and the third. First, we show that cross-country correlation of cycles and inflation have risen significantly in recent years among EMU participants, implying a tendency towards a fulfillment of the OCA conditions. Second, we provide evidence that the monetary policy rules followed by the EMU participating central banks have tended to converge. The introduction of the euro is a step in a gradual process, not a one-time regime change. JEL Classification: E52; F02; E32.

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 176.

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Length: 64 pages
Date of creation: Sep 2002
Date of revision:
Handle: RePEc:ecb:ecbwps:20020176

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Keywords: EMU; pptimum currency areas; monetary policy rules.;

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