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Optimum Currency Areas and Shock Asymmetry A Comparison of Europe and the United States

  • Nick Chamie

    (Bank of Canada)

  • Alain DeSerres

    (Bank of Canada)

  • Rene Lalonde

    (Bank of Canada)

The authors examine the optimality of the European Monetary Union (EMU) by estimating the degree of asymmetry in shocks affecting thirteen European countries and comparing the results to those obtained for nine U.S. regions. First, they identify supply shocks and real and nominal demand shocks by imposing restrictions on the long-term effects of these on the level of output, prices and money. This decomposition is necessary to develop a measure of shock asymmetry that is not affected by country-specific monetary policy disturbances. Next, the unobservable common and specific components of structural shocks are identified by means of state-space models. The results show that both supply and real demand shocks affecting the regions of the United States are much more symmetrical than those affecting the European countries. In Europe, only Germany and Switzerland are strongly related to the symmetrical component of shocks. The fact that Greece, Italy, Norway, Portugal and Sweden are not statistically related to the common component of the shocks suggests that they may face significant adjustment costs by participating in the European Monetary Union. However, these countries appear to be characterized by a smaller degree of nominal rigidity, which could partly offset the impact of asymmetrical shock by facilitating the adjustment. Shocks affecting France, Belgium, the Netherlands, the United Kingdom and Spain are largely asymmetrical, though statistically related to the common components.

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Paper provided by EconWPA in its series International Finance with number 9406001.

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Length: 50 pages
Date of creation: 22 Jun 1994
Date of revision: 23 Jun 1994
Handle: RePEc:wpa:wuwpif:9406001
Note: 50 printed pages, Compressed PostScript file. If you have trouble viewing the complete document, please print it out on a postscript printer. Other recent Bank of Canada working papers are listed on the last page of this report.
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  1. Simon van Norden & Huntley Schaller & ), 1995. "Speculative Behaviour, Regime-Switching, and Stock Market Crashes," Econometrics 9502003, EconWPA.
  2. P Clark & D Laxton, 1997. "Phillips Curves," CEP Discussion Papers dp0344, Centre for Economic Performance, LSE.
  3. Wirjanto, T.S. & Amano, R.A., 1993. "The Dynamic Demand for Money in Germany, Japan and the United Kingdom," Working Papers 9314, University of Waterloo, Department of Economics.
  4. Robert A. Amano & Simon van Norden, 1995. "Oil Prices and the Rise and Fall of the U.S. Real Exchange Rate," International Finance 9502001, EconWPA.
  5. Lafrance, Robert & St-Amant, Pierre, 2000. "Les zones monétaires optimales," L'Actualité Economique, Société Canadienne de Science Economique, vol. 76(4), pages 577-612, décembre.
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