Do Trade and Technology Reduce Asymmetries?: Evidence from Manufacturing Industries in the EU

Abstract:     
Many recent studies on EMU have found business cycle asymmetries among potential members of the union to be quite relevant. Such asymmetries clearly decrease the balance of benefits versus costs for potential members of a monetary union and may also raise doubts on the feasibility of a common monetary policy. In response to some of these doubts, we point out that asymmetries in the business cycle are not exogenous to the institutional context of the economy. They are instead likely to be influenced, among other factors, by the decision to participate in an economic and monetary union. In this paper we investigate whether asymmetric shocks to output are less important for industries which are more open to trade and more technology-intensive. Our results, obtained from a correlation analysis between growth rates of value added in thirteen manufacturing industries in eleven European countries between 1979 and 1990, clearly support the hypothesis. This finding suggests that an institutional environment (such as a monetary union) which is likely to further increase trade and technological innovation and diffusion among its members may help to decrease the importance of the asymmetric components of the business cycle.

JEL Classifications: E32, F15, F33

Working Paper Series