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Optimum Currency Areas and Shock Asymmetry A Comparison of Europe and the United States

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Author Info

  • Nick Chamie

    (Bank of Canada)

  • Alain DeSerres

    (Bank of Canada)

  • Rene Lalonde

    (Bank of Canada)

Abstract

The authors examine the optimality of the European Monetary Union (EMU) by estimating the degree of asymmetry in shocks affecting thirteen European countries and comparing the results to those obtained for nine U.S. regions. First, they identify supply shocks and real and nominal demand shocks by imposing restrictions on the long-term effects of these on the level of output, prices and money. This decomposition is necessary to develop a measure of shock asymmetry that is not affected by country-specific monetary policy disturbances. Next, the unobservable common and specific components of structural shocks are identified by means of state-space models. The results show that both supply and real demand shocks affecting the regions of the United States are much more symmetrical than those affecting the European countries. In Europe, only Germany and Switzerland are strongly related to the symmetrical component of shocks. The fact that Greece, Italy, Norway, Portugal and Sweden are not statistically related to the common component of the shocks suggests that they may face significant adjustment costs by participating in the European Monetary Union. However, these countries appear to be characterized by a smaller degree of nominal rigidity, which could partly offset the impact of asymmetrical shock by facilitating the adjustment. Shocks affecting France, Belgium, the Netherlands, the United Kingdom and Spain are largely asymmetrical, though statistically related to the common components.

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Bibliographic Info

Paper provided by EconWPA in its series International Finance with number 9406001.

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Length: 50 pages
Date of creation: 22 Jun 1994
Date of revision: 23 Jun 1994
Handle: RePEc:wpa:wuwpif:9406001

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References

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  1. Robert A. Amano & Simon van Norden, 1995. "Oil Prices and the Rise and Fall of the U.S. Real Exchange Rate," International Finance 9502001, EconWPA.
  2. Lafrance, Robert & St-Amant, Pierre, 2000. "Les zones monétaires optimales," L'Actualité Economique, Société Canadienne de Science Economique, vol. 76(4), pages 577-612, décembre.
  3. Van Norden, S. & Schaller, H., 1996. "Speculative Behaviour, Regime-Switching and Stock Market Crashes," Working Papers 96-13, Bank of Canada.
  4. Wirjanto, T.S. & Amano, R.A., 1993. "The Dynamic Demand for Money in Germany, Japan and the United Kingdom," Working Papers 9314, University of Waterloo, Department of Economics.
  5. P Clark & D Laxton, 1997. "Phillips Curves," CEP Discussion Papers dp0344, Centre for Economic Performance, LSE.
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Citations

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Cited by:
  1. Laurence Boone, 1997. "Symmetry and Asymmetry of Supply and Demand Shocks in the European Union," Working Papers 1997-03, CEPII research center.
  2. Jean-Pierre Allegret & Alain Sand-Zantman, 2006. "Disentangling business cycles and macroeconomic policy in Mercosur: a VAR and unobserved components model approaches," Documents de Travail de l'OFCE 2006-15, Observatoire Francais des Conjonctures Economiques (OFCE).
  3. Murray, John, 2000. "Why Canada needs a flexible exchange rate," The North American Journal of Economics and Finance, Elsevier, vol. 11(1), pages 41-60, August.
  4. Jean-Pierre Allegret & Alain Sand, 2007. "Modeling the impact of real and financial shocks on Mercosur: the role of the exchange rate regime," Working Papers 0701, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  5. Jean-Pierre Allegret & Alain Sand-Zantman, 2007. "Transmission des chocs et mécanismes d'ajustement dans le Mercosur," Post-Print halshs-00159553, HAL.
  6. Lionel Fontagné & Michael Freudenberg, 1999. "Endogenous Symmetry of Shocks in a Monetary Union," Open Economies Review, Springer, vol. 10(3), pages 263-287, July.
  7. Benigno, Pierpaolo, 2001. "Optimal Monetary Policy in a Currency Area," CEPR Discussion Papers 2755, C.E.P.R. Discussion Papers.
  8. Schor, Armand-Denis, 2000. "La théorie des zones monétaires optimales : l’optimum, le praticable, le crédible et le réel," L'Actualité Economique, Société Canadienne de Science Economique, vol. 76(4), pages 545-576, décembre.
  9. Fidrmuc, Jarko & Korhonen, Iikka, 2004. "A meta-analysis of business cycle correlation between the euro area and CEECs: What do we know – and who cares?," BOFIT Discussion Papers 20/2004, Bank of Finland, Institute for Economies in Transition.
  10. Hassapis, Christis & Pittis, Nikitas & Prodromidis, Kyprianos, 1999. "Unit roots and Granger causality in the EMS interest rates: the German Dominance Hypothesis revisited," Journal of International Money and Finance, Elsevier, vol. 18(1), pages 47-73, January.
  11. Igor Veličkovski & Aleksandar Stojkov, 2014. "Is the European integration speeding up the economic convergence process of the Central and South-Eastern European countries? A shock perspective," Empirica, Springer, vol. 41(2), pages 287-321, May.
  12. G. Peersman, 2005. "The relative importance of symmetric and asymmetric shocks and the determination of the exchange rate," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 05/286, Ghent University, Faculty of Economics and Business Administration.
  13. David Fielding & Kalvinder Shields, 2007. "Regional Asymmetries in the Impact of Monetary Policy Shocks on Prices: Evidence from US Cities," Working Papers 0702, University of Otago, Department of Economics, revised Feb 2007.
  14. Raoul Lättemäe, 2003. "EMU Accession Issues in Baltic Countries," Eastward Enlargement of the Euro-zone Working Papers wp17a, Free University Berlin, Jean Monnet Centre of Excellence, revised 01 May 2003.
  15. Chrigui Zouhair & Boujelbene Younes, 2009. "The Opportunities for Adopting Inflation Targeting in Tunisia: a Cointegration Study and Transmission Channels of Monetary Policy," Transition Studies Review, Springer, vol. 16(3), pages 671-692, October.

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