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The effect of currency unions on business cycle correlations: the EMU case

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  • Styliani Christodoulopoulou

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Abstract

This paper examines empirically the effects of the introduction of the euro on the output correlation among the member economies. The similarity of shocks affecting the members is an important condition to minimize the costs from the loss of national monetary policy implementation. Eichengreen (Economic Policy 10:118–187; 1990 ) pointed that this is an important condition to be satisfied before joining a currency union. Frankel and Rose (Economic J 108:1009–1025 1998 ) state that membership could lead to an ex post rise in output correlations. In the current study, we employ ex post and ex ante data on output for 11 members and 11 non-members of the EMU and we test whether the adoption of the euro increased the output synchronization among members compared to non-members. The main findings of this paper are that there is not robust evidence for a decrease in average correlation among members compared to the co-movement among non-members. Our sensitivity analysis reveals that for a group of countries considered to be the core of the European Union, the effect is statistically insignificant. Any decrease in correlation could be attributed to some extend to the countries of the periphery, and also to some of the countries considered as members of the core, giving credit to Eichengreen (Economic Policy 10:118–187; 1990 ) and Krugman ( 1990 ) arguments about increased specialization giving rise to idiosyncratic shocks. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Styliani Christodoulopoulou, 2014. "The effect of currency unions on business cycle correlations: the EMU case," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 41(2), pages 177-222, May.
  • Handle: RePEc:kap:empiri:v:41:y:2014:i:2:p:177-222
    DOI: 10.1007/s10663-012-9207-6
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    1. repec:eee:jmacro:v:55:y:2018:i:c:p:12-27 is not listed on IDEAS
    2. Bierbaumer-Polly, Jürgen & Huber, Peter & Huber, Petr, 2015. "The Impact of EU-Accession on Regional Business Cycle Synchronization and Sector Specialization," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113154, Verein für Socialpolitik / German Economic Association.
    3. Gächter, Martin & Riedl, Aleksandra, 2014. "One money, one cycle? The EMU experience," Journal of Macroeconomics, Elsevier, vol. 42(C), pages 141-155.
    4. Jürgen Bierbaumer-Polly & Peter Huber & Petr Rozmahel, 2016. "Regional Business-Cycle Synchronization, Sector Specialization and EU Accession," Journal of Common Market Studies, Wiley Blackwell, vol. 54(3), pages 544-568, May.

    More about this item

    Keywords

    Business cycle synchronization; Currency union membership; Difference in difference estimation; E32; F15; F33;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F15 - International Economics - - Trade - - - Economic Integration
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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