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Shock asymmetries and distance to the Euro Area

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  • Jean-Sébastien Pentecôte

    (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)

  • Marilyne Huchet

    (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique, SMART-LERECO - Structures et Marché Agricoles, Ressources et Territoires - INRA - Institut National de la Recherche Agronomique - AGROCAMPUS OUEST)

Abstract

Since January 2008, the Euro Area has enlarged for the third time to Cyprus and Malta. As Slovakia is now planned to join in 2009, these waves of new entries revive the debate around greater asymmetries which may threaten the stability of the whole monetary union. This paper extends Bayoumi and Eichengreen's (1992) centre-periphery approach. We show how a suitable decomposition of the correlations between supply and demand disturbances enables to get two new indices to give a more intuitive assessment of the distance to the Euro area and the origin of shock asymmetries. Using monthly data over 1995-2008 on 21 countries, asymmetries are measured by correlations among the structural shocks from a VAR process. We then translate these correlations estimates into two synthetic indices. One can be interpreted as the relative distance of the candidate country to a fully symmetric currency area. The other reveals the relative magnitude of shock asymmetries. Our very first results show that most of the countries under study are closer to the seminal Euro area rather than to Germany. New comers remain at the periphery of the Euro area with pronounced shock asymmetries than either the founder members or the three Opt-Outs.

Suggested Citation

  • Jean-Sébastien Pentecôte & Marilyne Huchet, 2009. "Shock asymmetries and distance to the Euro Area," Post-Print hal-00730072, HAL.
    • Handle: RePEc:hal:journl:hal-00730072
    Note: View the original document on HAL open archive server: https://institut-agro-rennes-angers.hal.science/hal-00730072
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    References listed on IDEAS

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