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The Shrinking Endogeneity of Optimum Currency Areas Criteria: Evidence from the European Monetary Union – A Beta Regression Approach


  • João Silvestre
  • António Mendonça
  • José Passos


The endogeneity of optimum currency areas criteria has been widely studied since Frankel and Rose (1998) seminal paper. Literature normally suggests that there is a positive relationship between trade and business cycles correlation. This paper develops work on this subject (Silvestre and Mendonça, 2007) where we confirm this hypothesis in euro area countries and UE-15 for 1967-2003 period using OLS and 2SLS estimates. However, we also find then that trade influence on cycles synchronization diminished in the last years. Now our goal was precisely to evaluate this question. Using a non-linear model based on Beta distribution in the same sample, we concluded that trade has a decreasing marginal effect on business cycles correlation. This result shows that trade flows are important in the first stages of economic integration, but become less important as trade intensity increases. Other factors must then be considered.

Suggested Citation

  • João Silvestre & António Mendonça & José Passos, 2007. "The Shrinking Endogeneity of Optimum Currency Areas Criteria: Evidence from the European Monetary Union – A Beta Regression Approach," Working Papers Department of Economics 2007/22, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
  • Handle: RePEc:ise:isegwp:wp222007

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    References listed on IDEAS

    1. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
    2. Giancarlo Corsetti & Paolo Pesenti, 2002. "Self-validating optimum currency areas," Staff Reports 152, Federal Reserve Bank of New York.
    3. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 7-46, April.
    4. Silvia Ferrari & Francisco Cribari-Neto, 2004. "Beta Regression for Modelling Rates and Proportions," Journal of Applied Statistics, Taylor & Francis Journals, vol. 31(7), pages 799-815.
    5. Michael Artis, 2003. "Is there a European Business Cycle?," CESifo Working Paper Series 1053, CESifo Group Munich.
    6. Andrew K. Rose & T. D. Stanley, 2005. "A Meta-Analysis of the Effect of Common Currencies on International Trade ," Journal of Economic Surveys, Wiley Blackwell, vol. 19(3), pages 347-365, July.
    7. Tamim Bayoumi & Barry Eichengreen, 1992. "Shocking Aspects of European Monetary Unification," NBER Working Papers 3949, National Bureau of Economic Research, Inc.
    8. Artis, Michael J & Zhang, W, 1997. "International Business Cycles and the ERM: Is There a European Business Cycle?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 2(1), pages 1-16, January.
    9. Mongelli, Francesco Paolo, 2002. "ìNew" Views on the Optimum Currency Area Theory: What is EMU Telling US?," Royal Economic Society Annual Conference 2002 140, Royal Economic Society.
    10. repec:kap:iaecre:v:13:y:2007:i:1:p:1-18 is not listed on IDEAS
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    Cited by:

    1. repec:krk:eberjl:v:1:y:2013:i:3:p:7-19 is not listed on IDEAS
    2. Krzysztof Beck, 2013. "Structural Similarity as a Determinant of Business Cycle Synchronization in the European Union: A Robust Analysis," Research in Economics and Business: Central and Eastern Europe, Tallinn School of Economics and Business Administration, Tallinn University of Technology, vol. 5(2).

    More about this item


    European Monetary Union (EMU); Business Cycles Correlation; Optimum Currency Areas; International Trade; Beta Regression.;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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