Hostname: page-component-78c5997874-4rdpn Total loading time: 0 Render date: 2024-11-15T18:51:17.287Z Has data issue: false hasContentIssue false
  • English
  • Français

Is Europe an optimum currency area?∗

Symmetric versus asymmetric shocks in the EC

Published online by Cambridge University Press:  26 March 2020

Guglielmo Maria Caporale
Get access Rights & Permissions [Opens in a new window]

Extract

Much of the debate on the desirability of a monetary union in Europe has focused on the question of whether Europe can be described as an optimum currency area (OCA). The European Commission in its report ‘One money, one market’ takes the view that this theoretical framework gives useful insights for the analysis of the economics of EMU and its potential costs and benefits, even though it is not decisive, but it has to be complemented by other approaches. Many studies have tried to provide an answer to the topical question of the optimality of introducing a single currency, adopting different research strategies. This note explains why a knowledge of the nature of the shocks is crucial to evaluating the potential costs of creating a monetary union, and applies a statistical technique known as principal components analysis to distinguish between common and country-specific shocks. After surveying the existing literature on OCAs, we present some new empirical results which confirm the relative importance of asymmetric shocks in the Community. A well-functioning monetary union could require some instruments for adjusting to shocks of this kind, for example fiscal transfers across the member countries.

Type
Articles
Information
National Institute Economic Review , Volume 144 , May 1993 , pp. 95 - 113
Copyright
Copyright © 1993 National Institute of Economic and Social Research

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

∗

I would like to thank Ray Barrell and Nicholas Oulton for helpful comments and suggestions.

References

Argy, V. (1989), ‘Choice of exchange rate regime for a smaller economy—A survey of some key issues’, in Choosing an Exchange Rate Regime: The Challenge for Smaller Industrial Countries, ed. by Argy, V. and Grauwe, P. De, CEPS/IMF.Google Scholar
Baldwin, R. (1990), ‘On the microeconomics of EMU’, European Economy.Google Scholar
Barrell, R. (ed.) (1992), Economic Convergence and Monetary Union in Europe, SAGE Publications, London.Google Scholar
Barro, R.J. and Gordon, D. (1983), ‘Acritical theory of monetary policy in a natural rate model’, Journal of Political Economy, 91, pp. 589–610.CrossRefGoogle Scholar
Bayoumi, T. and Eichengreen, B. (1992), ‘Shocking aspects of European monetary unification’, NBER Working Paper no. 3949.Google Scholar
Baxter, M. and Stockman, A.C. (1988), ‘Business cycles and the exchange rate system: some international evidence’, NBER Working Paper no. 2689.Google Scholar
Blanchard, O. and Quah, D. (1989), ‘The dynamic effects of aggregate demand and supply disturbances’, American Economic Review, 79, pp. 655–673.Google Scholar
Britton, A. and Mayes, D. (1992), Achieving Monetary Union in Europe, SAGE Publications, London.Google Scholar
Brociner, A. and Levine, P. (1992), ‘EMU: a survey’, Discussion Paper no. 07-92, Centre for Economic Forecasting, London Business School.Google Scholar
Cohen, D. and Wyplosz, C. (1989), ‘The European Monetary Union: an agnostic evaluation’, CEPR Discussion Paper no.306.Google Scholar
Commission of the European Communities (1990), ‘One market, one money: an evaluation of the potential benefits and costs of forming an economic and monetary union’, European Economy, 44, October.Google Scholar
Currie, D., Holtham, G. and Hallett, A. Hughes (1989), ‘The theory and practice of international policy coordination: does coordination pay?’, in Macroeconomic Policies in an Interdependent World, ed. by Bryant, R., Currie, D. and Portes, R., CEPR/The Brookings Institution/IMF.Google Scholar
De Grauwe, P. and Vanhaverbeke, W. (1991), ‘Is Europe an optimum currency area ? Evidence from regional data’, CEPR Discussion Paper no. 555.Google Scholar
Dornbusch, R. (1990), ‘Two-track EMU, now!’, in Pohl, K.O. et al, Britain and EMU, pp. 103–112, Centre for Economic Performance, London School of Economics.Google Scholar
Eichengreen, B. (1990a), ‘Is Europe an optimum currency area?’, CEPR Discussion Paper no. 478, forthcoming in Grubel, H. (ed.), European Economic Integration: The View From Outside, London. MacMillan.Google Scholar
Eichengreen, B. (1990b), ‘One money for Europe: Lessons from the US currency and customs union’, Economic Policy 10, pp. 118–187.Google Scholar
Eichengreen, B. (1991), ‘Labor markets and European monetary unification’, unpublished manuscript, University of California at Berkeley.Google Scholar
Gorsuch, R.L. (1974), Factor Analysis, Philadelphia, W.B.Saunders Co.Google Scholar
Harman, H.H. (1976), Modern Factor Analysis, 3rd edition, Chicago, University of Chicago Press.Google Scholar
Ishiyama, Y. (1975), ‘The theory of optimum currency areas: a survey’, IMF Staff Papers 22.CrossRefGoogle Scholar
Kenen, P.B. (1969), ‘The theory of optimum currency areas: an eclectic view’, in Mundell, R.A. and Swoboda, A.K. (eds), Monetary Problems of the International Economy, Chicago, University of Chicago Press.Google Scholar
Krugman, P. (1989), Exchange-Rate Instability, MIT Press, Cambridge, Massachussetts.Google Scholar
Masson, P.R. and Taylor, M.P. (1992), ‘Common currency areas and currency unions: an analysis of the issues’, CEPR Discussion Paper no. 617.Google Scholar
Mulaik, S.A. (1972), ‘The foundations of factor analysis’, New York, McGraw Hill.Google Scholar
Mundell, R. (1961), ‘A theory of optimum currency area’, American Economic Review, pp. 657–665.Google Scholar
Poloz, S.S. (1990), ‘Real exchange rate adjustment between regions in a common currency area’, unpublished manuscript, Bank of Canada.Google Scholar
Weber, A.A. (1990), ‘Asymmetries and adjustment problems: some empirical evidence’, European Economy.Google Scholar