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EMU, EU, Market Integration and Consumption Smoothing

  • Atanas Christev
  • Jacques Melitz

We take a new approach to the study of the impact of EMU on consumption smoothing that allows a broader range of channels to enter into view. It is no longer simply a question of the smoothing of asymmetric output shocks via cross-country holdings of property and claims, as is often the case. Consequently, we find that while EMU tends to smooth consumption, it is not through cross-country property and claims. Rather it comes through the promotion of the tradability of capital: specifically, the encouragement of price competition, contestable home markets, ability to borrow and buy insurance at home, and through an increase in the harmonization of regulations. Some of the consumption smoothing may also depend on EU membership rather than EMU as such but EMU adds to it. As a fundamental part of the analysis, the paper uses a new index of currency union which focuses on the ratio of trade with other countries sharing the same currency relative to total foreign trade.

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Paper provided by CEPII research center in its series Working Papers with number 2011-21.

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Date of creation: Oct 2011
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Handle: RePEc:cii:cepidt:2011-21
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