Data on output and prices for 11 EC member nations are analyzed to extract information on underlying aggregate supply and demand disturbances using a VAR decomposition. The coherence of the underlying shocks across countries and the speed of adjustment to these shocks are then compared to the results from US regional data. We find that the underlying shocks are significantly more idiosyncratic across EC countries than across US regions, which may indicate that the EC will find it more difficult to operate a monetary union. However a core of EC countries, made up of Germany and her immediate neighbors, experience shocks of similar magnitude and cohesion as the US regions. EC countries also exhibit a slower response to aggregate shocks than US regions, presumably reflecting lower factor mobility.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
3949.
Length: Date of creation: Jan 1992 Date of revision: Publication status: published as The Transition to Economic and Monetary Union in Europe Fransisco Torres and Francesco Giavazzi, Cambridge University Press; Cambridge, 1992 Shortened version in CEPR, A Single Currency for Europe, London: CEPR, 1992 Handle: RePEc:nbr:nberwo:3949
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