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Optimum Currency Areas and Shock Asymmetry A Comparison of Europe and the United States

Author

Listed:
  • Nick Chamie

    (Bank of Canada)

  • Alain DeSerres

    (Bank of Canada)

  • Rene Lalonde

    (Bank of Canada)

Abstract
The authors examine the optimality of the European Monetary Union (EMU) by estimating the degree of asymmetry in shocks affecting thirteen European countries and comparing the results to those obtained for nine U.S. regions. First, they identify supply shocks and real and nominal demand shocks by imposing restrictions on the long-term effects of these on the level of output, prices and money. This decomposition is necessary to develop a measure of shock asymmetry that is not affected by country-specific monetary policy disturbances. Next, the unobservable common and specific components of structural shocks are identified by means of state-space models. The results show that both supply and real demand shocks affecting the regions of the United States are much more symmetrical than those affecting the European countries. In Europe, only Germany and Switzerland are strongly related to the symmetrical component of shocks. The fact that Greece, Italy, Norway, Portugal and Sweden are not statistically related to the common component of the shocks suggests that they may face significant adjustment costs by participating in the European Monetary Union. However, these countries appear to be characterized by a smaller degree of nominal rigidity, which could partly offset the impact of asymmetrical shock by facilitating the adjustment. Shocks affecting France, Belgium, the Netherlands, the United Kingdom and Spain are largely asymmetrical, though statistically related to the common components.

Suggested Citation

  • Nick Chamie & Alain DeSerres & Rene Lalonde, 1994. "Optimum Currency Areas and Shock Asymmetry A Comparison of Europe and the United States," International Finance 9406001, University Library of Munich, Germany, revised 19 Aug 1994.
    • Handle: RePEc:wpa:wuwpif:9406001
    Note: 50 printed pages, Compressed PostScript file. If you have trouble viewing the complete document, please print it out on a postscript printer. Other recent Bank of Canada working papers are listed on the last page of this report.
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    References listed on IDEAS

    as
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    5. Lafrance, Robert & St-Amant, Pierre, 2000. "Les zones monétaires optimales," L'Actualité Economique, Société Canadienne de Science Economique, vol. 76(4), pages 577-612, décembre.
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    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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