The international dimension of a fragile EMU

Ioannou Demosthenes, Maria Sole Pagliari and Livio Stracca

Working papers from Banque de France

Abstract: This paper quantifies the economic influence that shocks to EMU cohesion, which in turn reflect the incomplete nature of the monetary union, have on the rest of the world, by disentangling euro area stress shocks and global risk aversion shocks on the basis of a combination of sign, magnitude and narrative restrictions in a daily Structural Vector Autoregression (VAR) model with financial variables. We find that the effects of euro area stress shocks are significant not only for the euro area but also for the rest of the world. Notably, an increase in euro area stress entails a slowdown of economic activity in the rest of the world, as well as a fall in imports/exports of both the euro area and the rest of the world. A decrease in euro area stress has somewhat more widespread beneficial effects on both economic performance and global trade activity.

Keywords: Economic and Monetary Union; Bayesian SVAR; narrative sign restrictions; panel local projections (search for similar items in EconPapers)
JEL-codes: C23 C32 F02 F33 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2020
New Economics Papers: this item is included in nep-cba, nep-eec and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:795

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