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

  • Nick Chamie (Bank of Canada),

    (Bank of Canada)

  • Alain DeSerres (Bank of Canada),

    (Bank of Canada)

  • Rene Lalonde (Bank of Canada)

    (Bank of Canada)

Registered author(s):

    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. Les auteurs examinent l'optimalite de l'Union Monetaire Europeenne (UME) en partant d'une evaluation empirique du degre d'asymetrie des chocs d'offre et de demande auxquels sont soumis treize pays d'Europe et en comparant les resultats avec ceux qu'ils ont obtenus pour neuf regions des Etats-Unis. Dans un premier temps, ils identifient les chocs d'offre ainsi que les chocs de demande reels et nominaux a l'aide de restrictions imposees aux effets que ces chocs peuvent avoir a long terme sur le niveau de la production, des prix et des encaisses reelles. Cette operation est necessaire pour obtenir une mesure des chocs asymetriques qui ne soit pas affectee par les effets de la politique monetaire specifique de chaque pays. Dans un deuxieme temps, les auteurs determinent les composantes inobservables communes et specifiques des chocs structurels en utilisant des modeles d'espace-d'etat. Les resultats montrent que les chocs d'offre et de demande reels affectant les regions americaines sont dans l'ensemble plus symetriques que ceux qu'enregistrent les pays europeens. En Europe, seuls les chocs affectant l'Allemagne et la Suisse sont fortement associes a la composante symetrique. Le fait que les chocs auxquels sont soumis la Grece, l'Italie, la Norvege, le Portugal et la Suede ne soient pas relies statistiquement a la composante commune indique que ces pays pourraient faire face a d'importants couts d'ajustement en adherant a l'UME. Toutefois, ils semblent caracterises par un degre de rigidites nominales plus faible, ce qui pourrait faciliter leur ajustement a un choc asymetrique. Les chocs touchant la France, la Belgique, les Pays-Bas, le Royaume-Uni et l'Espagne sont largement asymetriques, quoique statistiquement rattaches a la composante commune.

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    Paper provided by Bank of Canada in its series Working Papers with number 94-1.

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    Handle: RePEc:bca:bocawp:94-1
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    1. 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.
    2. P Clark & D Laxton, 1997. "Phillips Curves," CEP Discussion Papers dp0344, Centre for Economic Performance, LSE.
    3. 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.
    4. Van Norden, S. & Schaller, H., 1996. "Speculative Behaviour, Regime-Switching and Stock Market Crashes," Working Papers 96-13, Bank of Canada.
    5. 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.
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