Rethinking Optimum Currency Area Theory: Endogenous Synchronisation of Shocks in Europe

29 Pages Posted: 21 Jun 2018

See all articles by José Garcia

José Garcia

New University of Lisbon - Nova School of Business and Economics

Date Written: June 6, 2018

Abstract

This work aims to assess whether the hypothesis of endogenous synchronisation of shocks is verified in the European Economic and Monetary Union (EMU). A state-space model, which yields time-varying coefficients, is estimated with structural demand and supply shocks to several European economies and those of Germany. The goals is to obtain dynamic measures of correlation, which can help understand to what extent have structural shocks to European economies become more or less synchronised with Germany's throughout the EMU experience.

Evidence shows that demand shocks have become increasingly synchronised, which corroborates the hypothesis of endogeneity. However, this phenomenon does not seem to be restricted only to EMU members. Furthermore, results prove that this increasing synchronisation occurred mainly in peripheral countries.

For supply shocks conclusions are not as clear. Nevertheless, results do seem to point to the fact the countries outside the EMU have not become more structurally similar to Germany.

Keywords: Optimum currency area theory; Endogenous; European monetary integration; Synchronisation of shocks

JEL Classification: E32, F44, F45

Suggested Citation

Garcia, José, Rethinking Optimum Currency Area Theory: Endogenous Synchronisation of Shocks in Europe (June 6, 2018). Available at SSRN: https://ssrn.com/abstract=3192059 or http://dx.doi.org/10.2139/ssrn.3192059

José Garcia (Contact Author)

New University of Lisbon - Nova School of Business and Economics ( email )

Lisbon
Portugal

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