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EMU, EU, Market Integration and Consumption Smoothing

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  • Atanas Christev
  • Jacques Melitz

Abstract

We take a new approach to the study of the impact of EMU on consumption smoothing. Rather than relying on inferences based on the behavior of consumption levels or growth, we focus on consumption volatility and therefore on smoothing more directly. Consequently, we find that even though EMU tends to smooth consumption, it is not through cross-country property and claims. Rather it comes through the promotion of the tradability of goods, capital in particular: specifical-ly, the encouragement of price competition, contestable home markets, ability to borrow and buy insurance at home, and the harmonization of regulations. Some of the consumption smoothing may also depend on EU membership rather than EMU as such but EMU adds to it. As a funda-mental part of the analysis, the paper uses a new index of currency union which focuses on the ratio of trade with other countries sharing the same currency relative to total foreign trade.

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Paper provided by Department of Economics, School of Management and Languages, Heriot Watt University in its series Heriot-Watt University Economics Discussion Papers with number 1209.

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Date of creation: 2012
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Handle: RePEc:hwe:hwuedp:1209

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