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Convergence Of Shocks And Trade In The Enlarged European Union

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  • Athina Zervoyianni

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    (University of Patras, Greece and The Rimini Centre for Economic Analysis)

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    Abstract

    This paper explores the relation between trade flows and cross-country symmetry of supply and demand shocks using data from the EU27 countries. Increased bilateral trade intensity is found to have a positive impact on the correlation of both demand and supply shocks. Intra-industry trade is found to be positively linked to correlations of supply-side shocks but negatively linked to correlation of demand shocks. Our results thus provide support for the argument that aggregate demand spill-overs and intra-industry trade, rather than specialization, dominate in the process through which trade flows affect the cross-country transmission of shocks in Europe. At the same time, our estimates suggest that monetary-policy convergence in Europe (the circulation of the euro), while having increased symmetry of supply-side shocks, has had no direct favourable impact on symmetry of demand shocks. By contrast, the process of fiscal-policy convergence is found to have resulted in more correlated demand shocks across the EU member states. Classification-JEL: F4, F15, E32

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    Bibliographic Info

    Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 15-08.

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    Date of creation: Jan 2008
    Date of revision: Jan 2008
    Handle: RePEc:rim:rimwps:15-08

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    Keywords: convergence of shocks; trade flows; European integration; cyclical macroeconomic fluctuations;

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