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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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  • João Silvestre
  • António Mendonça
  • José Passos
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    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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    File URL: http://pascal.iseg.utl.pt/~depeco/wp/wp222007.pdf
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    Bibliographic Info

    Paper provided by ISEG - School of Economics and Management, Department of Economics, University of Lisbon in its series Working Papers Department of Economics 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, ISEG - School of Economics and Management, University of Lisbon, Rua do Quelhas 6, 1200-781 LISBON, PORTUGAL
    Web page: https://aquila1.iseg.ulisboa.pt/aquila/departamentos/EC

    Related research

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

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    1. Artis, Michael J & Zhang, Wenda, 1995. "International Business Cycles and the ERM: Is there a European Business Cycle?," CEPR Discussion Papers 1191, C.E.P.R. Discussion Papers.
    2. Andrew Rose, 2004. "A Meta-Analysis of the Effect of Common Currencies on International Trade," NBER Working Papers 10373, National Bureau of Economic Research, Inc.
    3. Mongelli, Francesco Paolo, 2002. ""New" views on the optimum currency area theory: what is EMU telling us?," Working Paper Series 0138, European Central Bank.
    4. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR & CES & MSH, vol. 15(30), pages 7-46, 04.
    5. Marianne Baxter & Robert G. King, 1995. "Measuring Business Cycles Approximate Band-Pass Filters for Economic Time Series," NBER Working Papers 5022, National Bureau of Economic Research, Inc.
    6. Giancarlo Corsetti & Paolo Pesenti, 2002. "Self-validating optimum currency areas," Staff Reports 152, Federal Reserve Bank of New York.
    7. Tamim Bayoumi & Barry Eichengreen, 1992. "Shocking Aspects of European Monetary Unification," NBER Working Papers 3949, National Bureau of Economic Research, Inc.
    8. Olivier Jean Blanchard & Danny Quah, 1990. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
    9. Silvia Ferrari & Francisco Cribari-Neto, 2004. "Beta Regression for Modelling Rates and Proportions," Journal of Applied Statistics, Taylor & Francis Journals, vol. 31(7), pages 799-815.
    10. Andrew K. Rose & T. D. Stanley, 2005. "A Meta-Analysis of the Effect of Common Currencies on International Trade ," Journal of Economic Surveys, Wiley Blackwell, vol. 19(3), pages 347-365, 07.
    11. 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.
    12. El-Agraa,Ali (ed.), 2007. "The European Union," Cambridge Books, Cambridge University Press, number 9780521874434, December.
    13. Michael Artis, 2003. "Is there a European Business Cycle?," CESifo Working Paper Series 1053, CESifo Group Munich.
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