Working Paper: NBER ID: w3949
Authors: Tamim Bayoumi; Barry Eichengreen
Abstract: Data on output and prices for 11 EC member nations are analyzed to extract information on underlying aggregate supply and demand disturbances using a VAR decomposition. The coherence of the underlying shocks across countries and the speed of adjustment to these shocks are then compared to 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. However a core of EC countries, made up of Germany and her immediate neighbors, experience shocks of similar magnitude and cohesion as the US regions. EC countries also exhibit a slower response to aggregate shocks than US regions, presumably reflecting lower factor mobility.
Keywords: European Monetary Unification; Aggregate Supply; Aggregate Demand; Economic Shocks
JEL Codes: E42; F33; F36
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| idiosyncratic nature of shocks (E32) | operational feasibility of a monetary union (F36) |
| structural differences in labor and capital mobility (F16) | slower response to aggregate shocks (E19) |
| aggregate demand disturbances (E00) | output (C67) |
| aggregate demand disturbances (E00) | prices (P22) |
| aggregate supply disturbances (E00) | prices (P22) |
| aggregate supply disturbances (E00) | output (C67) |