Working Paper: NBER ID: w3950
Authors: Tamim Bayoumi; Barry Eichengreen
Abstract: Recent proposals for enlarging the European Community to include the EFTA countries raise the question of whether the new members should participate in a European Monetary Union. In part, the issue hinges on the incidence of aggregate supply and demand disturbances. We use data on prices and output and a VAR decomposition to analyze this issue empirically, grouping economies according to the magnitude of the disturbances, their cross-country correlation, and speeds of response. This leads us to distinguish an EC "core" (made up of Germany and its immediate neighbors) and an EC periphery (made up of the UK and the Southern European members of the Community). Austria, Sweden and Switzerland behave more similarly to the EC core than do Norway, Finland and Iceland. This suggests that the case for EMU participation is stronger for Austria, Sweden and Switzerland than for the other EFTA countries.
Keywords: European Community; Monetary Union; Aggregate Supply; Demand Disturbances
JEL Codes: E42; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| correlation of disturbances among EC core countries (F36) | influences case for EMU participation (F36) |
| asymmetric shocks (F41) | need for asymmetric policy responses (F68) |
| EC challenges in running a monetary union (F36) | greater than United States (P19) |
| aggregate supply shocks (E00) | permanent changes in output (E23) |
| aggregate demand shocks (E00) | temporary changes in output (E23) |
| aggregate supply shocks (E00) | output (C67) |
| aggregate demand shocks (E00) | output (C67) |