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European Monetary Union: evidence from structural VARs

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  • Joseph A. Whitt, Jr.
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    Abstract

    This paper examines the historical pattern of aggregate demand and supply shocks in several European Monetary System countries in order to assess the desirability of monetary union. Countries with similar patterns of shocks are presumably better candidates for monetary union than those hit by wildly disparate shocks. The historical time series of shocks is identified by estimating a vector autoregressive model while imposing the restriction that demand shocks have no permanent effect on real output. In most cases supply shocks are positively correlated with those of Germany, but the negative correlation of demand shocks suggests that monetary union may not be desirable.

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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 95-1.

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    Date of creation: 1995
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    Handle: RePEc:fip:fedawp:95-1

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    Keywords: Monetary unions - European Union countries;

    References

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    1. Ahmed, Shaghil & Ickes, Barry W. & Ping Wang & Byung Sam Yoo, 1993. "International Business Cycles," American Economic Review, American Economic Association, vol. 83(3), pages 335-59, June.
    2. Ben S. Bernanke, 1986. "Alternative Explanations of the Money-Income Correlation," NBER Working Papers 1842, National Bureau of Economic Research, Inc.
    3. Gamber, Edward N & Joutz, Frederick L, 1993. "The Dynamic Effects of Aggregate Demand and Supply Disturbances: Comment," American Economic Review, American Economic Association, vol. 83(5), pages 1387-93, December.
    4. Tallman, Ellis W. & Wang, Ping, 1995. "Money demand and the relative price of capital goods in hyperinflations," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 375-404, November.
    5. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September.
    6. Bayoumi, Tamim & Eichengreen, Barry, 1992. "Shocking Aspects of European Monetary Unification," CEPR Discussion Papers 643, C.E.P.R. Discussion Papers.
    7. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    8. Matthew D. Shapiro & Mark W. Watson, 1988. "Sources of Business Cycle Fluctuations," NBER Working Papers 2589, National Bureau of Economic Research, Inc.
    9. Kenneth A. Froot & Kenneth Rogoff, 1991. "The EMS, the EMU, and the Transition to a Common Currency," NBER Working Papers 3684, National Bureau of Economic Research, Inc.
    10. Barry Eichengreen, 1991. "Is Europe an Optimum Currency Area?," NBER Working Papers 3579, National Bureau of Economic Research, Inc.
    11. Faust, Jon & Leeper, Eric M, 1997. "When Do Long-Run Identifying Restrictions Give Reliable Results?," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(3), pages 345-53, July.
    12. Bean, Charles R, 1992. "Economic and Monetary Union in Europe," CEPR Discussion Papers 722, C.E.P.R. Discussion Papers.
    13. Christopher A. Sims, 1986. "Are forecasting models usable for policy analysis?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-16.
    14. Bayoumi, Tamim & Eichengreen, Barry, 1992. "Shocking Aspects of Monetary Unification," Department of Economics, Working Paper Series qt791143kp, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    15. Marco Lippi & Lucrezia Reichlin, 1993. "The dynamic effects of aggregate demand and supply disturbances: comment," ULB Institutional Repository 2013/10159, ULB -- Universite Libre de Bruxelles.
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    Cited by:
    1. Hartley, Peter R. & Whitt Jr, Joseph A., 2003. "Macroeconomic fluctuations: Demand or supply, permanent or temporary?," European Economic Review, Elsevier, vol. 47(1), pages 61-94, February.
    2. Peter R. Hartley & Joseph A. Whitt, Jr., 1997. "Macroeconomic fluctuations in Europe: demand or supply, permanent or temporary?," Working Paper 97-14, Federal Reserve Bank of Atlanta.
    3. Julius Horvath, 2004. "Optimum currency area theory: A selective review," Macroeconomics 0401014, EconWPA.
    4. Fisher, Douglas, 1996. "Monetary aggregation in the United States and Canada," The North American Journal of Economics and Finance, Elsevier, vol. 7(1), pages 91-106.

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