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The Relative Importance of Symmetric and Asymmetric Shocks: the Case of United Kingdom and Euro Area

Author

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  • Gert Peersman

    () (Ghent University)

Abstract

In this paper, we show how a simple model with sign restrictions can be used to identify symmetric and asymmetric supply, demand and monetary policy shocks in a two-country structural VAR. The results can be used to deal with several issues that are important in the OCA-literature. Whilst the method can be applied to many countries, we provide evidence for the UK versus the Euro Area which are compared versus the US as a benchmark. An important role for symmetric shocks with the Euro Area in explaining UK output fluctuations is found. However, the relative importance of asymmetric shocks, being around 20 percent in the long-run, cannot be ignored. In contrast, the degree of business cycle synchronization seems to have been higher with the US. Moreover, the historical average reaction of the policy rate to symmetric aggregate demand shocks was stronger in the UK than the Euro Area. We also confirm existing evidence of the exchange rate being an important independent source of shocks in the economy.

Suggested Citation

  • Gert Peersman, 2007. "The Relative Importance of Symmetric and Asymmetric Shocks: the Case of United Kingdom and Euro Area," Working Papers 136, Oesterreichische Nationalbank (Austrian Central Bank).
  • Handle: RePEc:onb:oenbwp:136
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    Cited by:

    1. Volha Audzei & Frantisek Brazdik, 2015. "Exchange Rate Dynamics and its Effect on Macroeconomic Volatility in Selected CEE Countries," Working Papers 2015/07, Czech National Bank, Research Department.
    2. M. Aria & G.L. Gaeta & U. Marani, 2015. "Competitiveness Gap among Regions during the Sovereign Debt Crisis: the Italian Mezzogiorno between Resistance and Surrender," Rivista economica del Mezzogiorno, Società editrice il Mulino, issue 3-4, pages 399-426.
    3. Ferreira-Lopes, Alexandra, 2010. "In or out? The welfare costs of EMU membership," Economic Modelling, Elsevier, vol. 27(2), pages 585-594, March.
    4. Volha Audzei & Frantisek Brazdik, 2015. "Monetary Policy and Exchange Rate Dynamics: The Exchange Rate as a Shock Absorber," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 65(5), pages 391-410, October.
    5. Martin Schneider & Gerhard Fenz, 2011. "Transmission of business cycle shocks between the US and the euro area," Applied Economics, Taylor & Francis Journals, vol. 43(21), pages 2777-2793.
    6. Haroon Mumtaz & Laura Sunder‐Plassmann, 2013. "Time‐Varying Dynamics Of The Real Exchange Rate: An Empirical Analysis," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 28(3), pages 498-525, April.
    7. Karlo Kotarac & Davor Kunovac & Rafael Ravnik, 2017. "Coherence of Business Cycles and Economic Shocks between Croatia and Euro Area Member States," Working Papers 53, The Croatian National Bank, Croatia.
    8. Ensar Yilmaz, 2012. "The Exchange Rate: A Shock Absorber or Source of Shocks in Turkey?," International Economic Journal, Taylor & Francis Journals, vol. 26(1), pages 175-188, October.
    9. repec:bla:reviec:v:25:y:2017:i:1:p:165-194 is not listed on IDEAS
    10. Michael Pedersen, 2015. "The Impact of Commodity Price Shocks in a Major Producing Economy. The Case of Copper and Chile," Working Papers Central Bank of Chile 753, Central Bank of Chile.
    11. Michael Pedersen & Miguel Ricaurte B., 2014. "Effects of Oil-Price Shocks on The Economies Of Chile and Its Trading Partners," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 17(1), pages 38-65, April.
    12. Montinari, Letizia & Stracca, Livio, 2016. "Trade, finance or policies: What drives the cross-border spill-over of business cycles?," Journal of Macroeconomics, Elsevier, vol. 49(C), pages 131-148.
    13. Elekdag, Selim & Han, Fei, 2015. "What drives credit growth in emerging Asia?," Journal of Asian Economics, Elsevier, vol. 38(C), pages 1-13.
    14. Alberto Coco & Andrea Silvestrini, 2017. "The nature and propagation of shocks in the euro area: a comparative SVAR analysis," International Journal of Computational Economics and Econometrics, Inderscience Enterprises Ltd, vol. 7(1/2), pages 95-114.
    15. repec:cnb:ocpubv:rb15/1 is not listed on IDEAS
    16. Cover, James P. & Mallick, Sushanta K., 2012. "Identifying sources of macroeconomic and exchange rate fluctuations in the UK," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1627-1648.
    17. Luís Francisco Aguiar & Teresa Maria Rodrigues & Maria Joana Soares, 2012. "Oil Shocks and the Euro as an Optimum Currency Area," NIPE Working Papers 07/2012, NIPE - Universidade do Minho.
    18. Michael Pedersen & Miguel Ricaurte, 2013. "Efectos de Shocks al Precio del Petróleo sobre la Economía de Chile y sus Socios Comerciales," Working Papers Central Bank of Chile 691, Central Bank of Chile.

    More about this item

    Keywords

    optimal currency areas; symmetric and asymmetric shocks; vector autoregressions;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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