Working Paper: CEPR ID: DP643
Authors: Tamim Bayoumi; Barry Eichengreen
Abstract: Data on output and prices for eleven EC member nations are analysed using a VAR decomposition to extract information on underlying aggregate supply and demand disturbances. The coherence of the underlying shocks across countries and the speed of adjustment to these shocks are compared with the results from US regional data. We find that the underlying shocks are significantly more idiosyncratic across EC countries than across US regions, which may indicate that the EC will find it more difficult to operate a monetary union. A core of EC countries - Germany and her immediate neighbours - experience shocks of similar magnitude and cohesion as the US regions, however. EC countries also exhibit a slower response to aggregate shocks than US regions, presumably reflecting lower factor mobility.
Keywords: EMU; exchange rates
JEL Codes: F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| aggregate supply shocks (E00) | economic stability in EMU (F36) |
| aggregate demand shocks (E00) | output (C67) |
| aggregate demand shocks (E00) | prices (P22) |
| aggregate supply shocks (E00) | output (C67) |
| aggregate supply shocks (E00) | prices (P22) |
| lower factor mobility (F20) | slower adjustment process for EC countries (F36) |
| factors mobility (F20) | adjustment speed of shocks (C69) |
| completion of internal market (F15) | regional economic specialization (R11) |
| regional economic specialization (R11) | economic divergence and adjustment problems for EMU (F36) |