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Fear of a two-speed monetary union: what does a basic correlation scatter plot tell us?

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  • Jean-Sébastien Pentecôte

    (University of Rennes 1 - CREM, (UMR 6211 CNRS))

Abstract

I extend the Bayoumi-Eichengreen (1993) approach by extracting new information from a scatter plot of correlation coefficients between shocks in order to better visualize how far a given country is from a monetary union. Indexes of distance and relative strength can be derived from either a nonlinear or a linear combination of correlations in connexion with distinct welfare loss functions. Using quarterly data on ten countries over 1979:I-2011:IV, shocks have become more symmetric within, but also outside, the euro area. Despite less asymmetry in shock asymmetry since 1999, new statistical tests support the idea of a two-speed EMU.

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Paper provided by Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS in its series Economics Working Paper Archive (University of Rennes 1 & University of Caen) with number 201218.

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Date of creation: Mar 2012
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Handle: RePEc:tut:cremwp:201218

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Postal: CREM (UMR CNRS 6211) - Faculty of Economics, 7 place Hoche, 35065 Rennes Cedex - France
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Keywords: monetary union; euro; shock asymmetry; distance; VAR identification;

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  1. Nolan, Charles, 2002. "Monetary Stabilisation Policy in a Monetary Union: Some Simple Analytics," Scottish Journal of Political Economy, Scottish Economic Society, vol. 49(2), pages 196-215, May.
  2. Harris Dellas & George S.Tavlas, 2009. "An Optimum-Currency-Area Odyssey," Working Papers 102, Bank of Greece.
  3. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbance," Working papers 497, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Lane, Philip R, 2000. " Asymmetric Shocks and Monetary Policy in a Currency Union," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(4), pages 585-604, December.
  5. Haan, Jakob de & Inklaar, Robert & Jong-A-Pin, Richard, 2005. "Will business cycles in the Euro Area converge : a critical survey of empirical research," CCSO Working Papers 200508, University of Groningen, CCSO Centre for Economic Research.
  6. Øistein RØisland & Ragnar Torvik, 2003. "Optimum Currency Areas Under Inflation Targeting," Open Economies Review, Springer, vol. 14(2), pages 99-118, April.
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