IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

How have global shocks impacted the real effective exchange rates of individual euro area countries since the euro's creation?

This paper uncovers the response pattern to global shocks of euro area countries' real effective exchange rates before and after the start of Economic and Monetary Union (EMU), a largely open ended question when the euro was created. We apply to that end a newly developed methodology based on high dimensional VAR theory. This approach features a dominant unit to a large set of over 60 countries' real effective exchange rates and is based on the comparison of two estimated systems: one before and one after EMU. We find strong evidence that the pattern of responses depends crucially on the nature of global shocks. In particular, post-EMU responses to global US dollar shocks have become similar to Germany's response before EMU, i.e. to that of the economy that used to issue Europe's most credible legacy currency. By contrast, post-EMU responses of euro area countries to global risk aversion shocks have become similar to those of Italy, Portugal or Spain before EMU, i.e. of economies of the euro area's periphery. Our findings also suggest that the divergence in external competitiveness among euro area countries over the last decade, which is at the core of today's debate on the future of the euro area, is more likely due to country-specific shocks than to global shocks.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: https://publications.banque-france.fr/sites/default/files/medias/documents/working-paper_336_2011.pdf
Download Restriction: no

Paper provided by Banque de France in its series Working papers with number 336.

as
in new window

Length: 47 pages
Date of creation: 2011
Handle: RePEc:bfr:banfra:336
Contact details of provider: Postal:
Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS

Web page: http://www.banque-france.fr/

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Alexander Chudik & M. Hashem Pesaran & Elisa Tosetti, 2011. "Weak and strong cross‐section dependence and estimation of large panels," Econometrics Journal, Royal Economic Society, vol. 14, pages C45-C90, 02.
  2. Philip R. Lane, 2006. "Global Bond Portfolios and EMU," International Journal of Central Banking, International Journal of Central Banking, vol. 2(2), May.
  3. Dées, Stéphane & Pesaran, Hashem & Smith, Vanessa & Smith, Ron P., 2010. "Supply, demand and monetary policy shocks in a multi-country New Keynesian Model," Working Paper Series 1239, European Central Bank.
  4. Enders, Zeno & Jung, Philip & Müller, Gernot J., 2013. "Has the Euro changed the business cycle?," European Economic Review, Elsevier, vol. 59(C), pages 189-211.
  5. Stephane Dees & Filippo di Mauro & M. Hashem Pesaran & L. Vanessa Smith, 2006. "Exploring the International Linkages of the Euro Area: a Global VAR Analysis," Computing in Economics and Finance 2006 47, Society for Computational Economics.
  6. Chudik, Alexander & Pesaran, M. Hashem, 2007. "Infinite Dimensional VARs and Factor Models," IZA Discussion Papers 3206, Institute for the Study of Labor (IZA).
  7. Maurice Obstfeld & Kenneth S. Rogoff, 2005. "Global Current Account Imbalances and Exchange Rate Adjustments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(1), pages 67-146.
  8. James H. Stock & Mark W. Watson, 2003. "Has the Business Cycle Changed and Why?," NBER Chapters, in: NBER Macroeconomics Annual 2002, Volume 17, pages 159-230 National Bureau of Economic Research, Inc.
  9. Hyun Song Shin & Erkko Etula & Tobias Adrian, 2010. "Risk Appetite and Exchange Rates," 2010 Meeting Papers 311, Society for Economic Dynamics.
  10. J. A. Hausman, 1976. "Specification Tests in Econometrics," Working papers 185, Massachusetts Institute of Technology (MIT), Department of Economics.
  11. Giavazzi, Francesco & Spaventa, Luigi, 2010. "Why the current account may matter in a monetary union: Lessons from the financial crisis in the Euro area," CEPR Discussion Papers 8008, C.E.P.R. Discussion Papers.
  12. M. Hashem Pesaran & Alexander Chudik, 2010. "Econometric Analysis of High Dimensional VARs Featuring a Dominant Unit," CESifo Working Paper Series 3055, CESifo Group Munich.
  13. Ilian Mihov, 2001. "Monetary policy implementation and transmission in the European Monetary Union," Economic Policy, CEPR;CES;MSH, vol. 16(33), pages 369-406, October.
  14. Pedro Perez & Denise Osborn & Michael Artis, 2006. "The International Business Cycle in a Changing World: Volatility and the Propagation of Shocks in the G-7," Open Economies Review, Springer, vol. 17(3), pages 255-279, July.
  15. Pesaran, H. Hashem & Shin, Yongcheol, 1998. "Generalized impulse response analysis in linear multivariate models," Economics Letters, Elsevier, vol. 58(1), pages 17-29, January.
  16. Fabio Canova & Matteo Ciccarelli & Eva Ortega, 2004. "Similarities and convergence in G-7 cycles," Working Papers 0404, Banco de España;Working Papers Homepage.
  17. Sean Holly & M. Hashem Pesaran & Takashi Yamagata, 2010. "Spatial and Temporal Diffusion of House Prices in the UK," CESifo Working Paper Series 2913, CESifo Group Munich.
  18. Obstfeld, Maurice & Rogoff, Kenneth, 2009. "Global Imbalances and the Financial Crisis: Products of Common Causes," CEPR Discussion Papers 7606, C.E.P.R. Discussion Papers.
  19. repec:spo:wpecon:info:hdl:2441/c8dmi8nm4pdjkuc9g7287gghh is not listed on IDEAS
  20. M. Hashem Pesaran & Til Schuermann & Scott M. Weiner, 2001. "Modelling regional interdependencies using a global error-correcting macroeconometric model," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 B4-1, International Conferences on Panel Data.
  21. Cappiello, Lorenzo & Kadareja, Arjan & Manganelli, Simone, 2008. "The impact of the euro on equity markets: a country and sector decomposition," Working Paper Series 0906, European Central Bank.
  22. M. Hashem Pesaran, 2006. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," Econometrica, Econometric Society, vol. 74(4), pages 967-1012, 07.
  23. Stephen G Cecchetti & Alfonso Flores-Lagunes & Stefan Krause, 2005. "Assessing the Sources of Changes in the Volatility of Real Growth," RBA Annual Conference Volume, in: Christopher Kent & David Norman (ed.), The Changing Nature of the Business Cycle Reserve Bank of Australia.
  24. Coeurdacier, Nicolas & Martin, Philippe, 2009. "The geography of asset trade and the euro: Insiders and outsiders," Journal of the Japanese and International Economies, Elsevier, vol. 23(2), pages 90-113, June.
  25. repec:spo:wpmain:info:hdl:2441/c8dmi8nm4pdjkuc9g7287gghh is not listed on IDEAS
  26. Taylor, Mark P & Peel, David A & Sarno, Lucio, 2001. "Nonlinear Mean-Reversion in Real Exchange Rates: Toward a Solution to the Purchasing Power Parity Puzzles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 1015-42, November.
  27. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
  28. Andrews, Donald W K & Ploberger, Werner, 1994. "Optimal Tests When a Nuisance Parameter Is Present Only under the Alternative," Econometrica, Econometric Society, vol. 62(6), pages 1383-1414, November.
  29. Frenkel, Jacob, 2009. "Global imbalances and the financial crisis: products of common causes - commentary," Proceedings, Federal Reserve Bank of San Francisco, issue Oct, pages 179-184.
  30. Helge Berger & Volker Nitsch, 2010. "The Euro’s Effecton Trade Imbalances," IMF Working Papers 10/226, International Monetary Fund.
  31. Wu, De-Min, 1973. "Alternative Tests of Independence Between Stochastic Regressors and Disturbances," Econometrica, Econometric Society, vol. 41(4), pages 733-50, July.
  32. Adina Popescu & Frank Rafael Smets, 2010. "Uncertainty, Risk-taking, and the Business Cycle in Germany," CESifo Economic Studies, CESifo, vol. 56(4), pages 596-626, December.
  33. Caballero, Ricardo J., 2009. "Global imbalances and the financial crisis: products of common causes - commentary," Proceedings, Federal Reserve Bank of San Francisco, issue Oct, pages 173-177.
  34. Florence Jaumotte & Piyaporn Sodsriwiboon, 2010. "Current Account Imbalances in the Southern Euro Area," IMF Working Papers 10/139, International Monetary Fund.
  35. Rogers, John H., 2007. "Monetary union, price level convergence, and inflation: How close is Europe to the USA?," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 785-796, April.
  36. Robert N McCauley & Patrick McGuire, 2009. "Dollar appreciation in 2008: safe haven, carry trades, dollar shortage and overhedging," BIS Quarterly Review, Bank for International Settlements, December.
  37. De Santis, Robert A. & Gérard, Bruno, 2009. "International portfolio reallocation: Diversification benefits and European monetary union," European Economic Review, Elsevier, vol. 53(8), pages 1010-1027, November.
  38. Ploberger, Werner & Kramer, Walter, 1992. "The CUSUM Test with OLS Residuals," Econometrica, Econometric Society, vol. 60(2), pages 271-85, March.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:bfr:banfra:336. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael brassart)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.