From the Erm to the Euro: New Evidence on Economic and Policy Convergence Among EU Countries

34 Pages Posted: 10 Dec 2002

See all articles by Ignazio Angeloni

Ignazio Angeloni

Italian Finance Ministry - International Financial Relations

Luca Dedola

Bank of Italy; European Central Bank (ECB)

Date Written: May 1999

Abstract

Skeptic views on EMU are usually cast around three arguments. First, the EU does not satisfy "Optimum Currency Area" (OCA) conditions. Second, heterogeneous economic and financial structures will produce differences in monetary transmission. Third, the shift from domestic to area-wide considerations may give rise to conflicts in the decision making of the European Central Bank (ECB).

While we do not address the second of these concerns, we present some evidence that goes in the direction of mitigating the first and the third. First, we show that cross-country correlation of cycles and inflation have risen significantly in recent years among EMU participants, implying a tendency towards a fulfillment of the OCA conditions. Second, we provide evidence that the monetary policy rules followed by the EMU participating central banks have tended to converge. The introduction of the euro is a step in a gradual process, not a one-time regime change.

Keywords: EMU; Optimum Currency Areas; Monetary Policy Rules

JEL Classification: E52, F02, E32

Suggested Citation

Angeloni, Ignazio and Dedola, Luca, From the Erm to the Euro: New Evidence on Economic and Policy Convergence Among EU Countries (May 1999). ECB Working Paper No. 4, Available at SSRN: https://ssrn.com/abstract=355142

Ignazio Angeloni (Contact Author)

Italian Finance Ministry - International Financial Relations ( email )

Via XX Settembre 97
Rome, Rome 00187
Italy

Luca Dedola

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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