How similar are country- and sector-responses to common shocks within the euro area?

Alexander Rathke, Sina Streicher and Jan-Egbert Sturm

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

Abstract: Ever since the introduction of the Euro, there have been discussions about whether Europe constitutes an optimal currency area. The Great Recession and the European debt crisis have rekindled and intensified this debate. Heterogeneous country experiences have led to questioning the rationale for a common monetary policy in the absence of a common fiscal framework to cushion macroeconomic shocks. In this paper, we examine whether the impact of typical macroeconomic shocks at the European Monetary Union (EMU) level varies across countries and sectors. We follow Furlanetto et al. (2017) and estimate common euro area macroeconomic supply, demand, monetary, investment, and financial shocks using sign restrictions. We calculate the impulse responses to these shocks at the country-sector level using local linear projections and propose a measure for business cycle synchronisation based on the similarity of the responses. We find varying degrees of heterogeneity across member countries' responses to common EMU shocks. Although the responses of economic sectors are themselves heterogeneous, different sector-decompositions across countries cannot explain the cross-country heterogeneity. Contrary to e.g. Bayoumi and Eichengreen (1993, 2017), we identify Italy to be a core country. In line with recent literature, the level of heterogeneity was the most pronounced during the financial crisis compared to pre- and post-crisis periods.

Keywords: Monetary union; Euro area; Aggregate shocks; Shock transmission; Optimal currency area (search for similar items in EconPapers)
JEL-codes: E32 E42 E52 E58 F15 F33 F42 F44 F45 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0261560620302692
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:120:y:2022:i:c:s0261560620302692

DOI: 10.1016/j.jimonfin.2020.102313

Access Statistics for this article

Journal of International Money and Finance is currently edited by J. R. Lothian

More articles in Journal of International Money and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().