Moving closer? Comparing regional adjustments to shocks in EMU and the United States

Davide Furceri, Prakash Loungani and Pietro Pizzuto

Journal of International Money and Finance, 2022, vol. 120, issue C

Abstract: This paper analyzes alternative channels of adjustment to nominal exchange rate flexibility in response to shocks faced by countries and regions that are part of a monetary union. Over our full sample period of analysis (1977–2018), the results suggest a dominant role of interstate migration as an adjustment channel to labor demand shocks for the United States. In contrast, European countries tend to adjust to negative labor demand shocks mainly through changes in labor force participation and unemployment. Labor mobility is lower in the euro area, regardless of whether one is looking at cross-country migration or within-country mobility. Price flexibility is more important as a shock absorber to labor demand shocks in the EMU compared to the United States. We also document that risk-sharing mechanisms have been, on average, more effective in smoothing income fluctuations in the United States than in the EMU. The strength of these channels, however, has changed over time both for the EMU and in the United States. In particular, the results suggest that the pattern of regional adjustments to shocks in EMU and the United States is moving closer, partly because of strengthening of adjustment channels in the EMU and partly because of weakening of these channels in the United States.

Keywords: Euro; Currency unions; Regional adjustments; Risk-sharing (search for similar items in EconPapers)
JEL-codes: E32 E42 F41 F42 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:120:y:2022:i:c:s0261560620302382

DOI: 10.1016/j.jimonfin.2020.102282

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