Working Paper: CEPR ID: DP1558
Authors: Antonio Fatas
Abstract: The future adoption of a single currency among some of the members of the European Union has raised many concerns about the ability of EMU to deal with shocks that are specific to regions or countries. The assumption behind these concerns is that national business cycles in Europe are fairly pronounced and that exchange rates are good stabilizing tools. This paper characterizes regional and national fluctuations within the European Union and studies how the process of integration and the creation of the EMS has affected these patterns. Our results indicate that national borders have seen their economic significance reduced over time as the process of integration has increased cross-border correlations and reduced within-border comovements.
Keywords: European Monetary Union; Integration; Regions
JEL Codes: E32; F33; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased trade and policy coordination (F42) | Increased cross-border correlations in business cycles (F44) |
| Increased trade and policy coordination (F42) | Decreased correlations within countries (F69) |
| European integration (F15) | Increased cross-border correlations in business cycles (F44) |
| European integration (F15) | Decreased correlations within countries (F69) |
| Single currency introduction (F36) | Diminished national components of business cycles (F44) |
| Integration progress (F15) | Decrease in costs associated with EMU (F36) |
| Northern Italian regions (N93) | Higher correlations with German regions (R12) |
| Northern Italian regions (N93) | Lower correlations with southern Italian regions (R12) |