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The Shrinking Endogeneity of Optimum Currency Areas Criteria: Evidence from the European Monetary Union – A Beta Regression Approach

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Author Info
João Silvestre
António Mendonça
José Passos
Abstract

The endogeneity of optimum currency areas criteria has been widely studied since Frankel and Rose (1998) seminal paper. Literature normally suggests that there is a positive relationship between trade and business cycles correlation. This paper develops work on this subject (Silvestre and Mendonça, 2007) where we confirm this hypothesis in euro area countries and UE-15 for 1967-2003 period using OLS and 2SLS estimates. However, we also find then that trade influence on cycles synchronization diminished in the last years. Now our goal was precisely to evaluate this question. Using a non-linear model based on Beta distribution in the same sample, we concluded that trade has a decreasing marginal effect on business cycles correlation. This result shows that trade flows are important in the first stages of economic integration, but become less important as trade intensity increases. Other factors must then be considered.

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Paper provided by Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon. in its series Working Papers with number 2007/22.

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Date of creation: 2007
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Handle: RePEc:ise:isegwp:wp222007

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Postal: Department of Economics, School of Economics and Management (ISEG), Technical University of Lisbon, Rua do Quelhas 6, 1200-781 LISBON, PORTUGAL
Web page: http://www.iseg.utl.pt/departamentos/economia/

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Related research
Keywords: European Monetary Union (EMU) Business Cycles Correlation Optimum Currency Areas International Trade Beta Regression.

Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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  1. Giancarlo Corsetti & Paolo Pesenti, 2002. "Self-Validating Optimum Currency Areas," NBER Working Papers 8783, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Francesco Paolo Mongelli, 2002. "'New' views on the optimum currency area theory: what is EMU telling us?," Working Paper Series 138, European Central Bank. [Downloadable!]
    Other versions:
  3. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November. [Downloadable!] (restricted)
    Other versions:
  4. Artis, Michael J & Zhang, W, 1997. "International Business Cycles and the ERM: Is There a European Business Cycle?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 2(1), pages 1-16, January. [Downloadable!] (restricted)
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  5. João Silvestre & António Mendonça, 2007. "The Endogeneity of Optimum Currency Areas Criteria: Some Evidence from the European Union and Portugal," International Advances in Economic Research, Springer, vol. 13(1), pages 1-18, February. [Downloadable!] (restricted)
  6. Silvia Ferrari & Francisco Cribari-Neto, 2004. "Beta Regression for Modelling Rates and Proportions," Journal of Applied Statistics, Taylor and Francis Journals, vol. 31(7), pages 799-815, January. [Downloadable!] (restricted)
  7. 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. [Downloadable!] (restricted)
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  8. Michael Artis, 2003. "Is there a European Business Cycle?," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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