Working Paper: CEPR ID: DP988
Authors: Tamim Bayoumi; Alun Thomas
Abstract: Structural vector autoregressions are used to analyse the relationship between real output and relative prices within the European Union (EU) and the United States. Relative price variability appears to be more important for adjustment within the EU than the United States, reflecting the lower integration of goods and factor markets. In the absence of higher market integration, the lower relative price variability implied by the introduction of a single currency in the EU could well cause significant economic disruption.
Keywords: relative prices; common currency; EMU
JEL Codes: F15; F33; R11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fluctuations in relative prices (E39) | Economies buffer against output shocks (F41) |
| EU's lower integration of goods and factor markets (F16) | Greater reliance on relative price adjustments (E39) |
| Introduction of a single currency in the EU (F36) | Reduced flexibility of relative prices (E31) |
| US market integration between 1960s and 1980s (N22) | Quicker adjustments to output shocks through relative price changes (E39) |
| Exchange rate turmoil in the EU during 1992-1993 (F31) | Difficulties in adjusting relative prices in response to demand shocks (E31) |
| EU's lower market integration (F15) | Higher degree of relative price flexibility needed to manage economic disturbances (E39) |