SYMMETRY OF DEMAND AND SUPPLY SHOCKS IN THE EUROZONE

Pedro Oliveira, Maria Paula Fontoura, Nuno Sobreira

No 2023/0275, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: This paper uses quarterly data for the period of 2004-2019 to investigate the symmetry of cross-country demand and supply shocks in the Eurozone. For this purpose, the structural Vector Autoregressive model (VAR) from BLANCHARD and QUAH (1989) is used to disentangle both types of shocks from cyclical fluctuations in real output and prices, followed by the computation of correlation coefficients of shocks between Euro partners and three alternative benchmarks – Germany, European Union 27 (EU-27) and France. It also investigates whether increased trade integration has contributed positively to a more symmetrical spread of demand and supply shocks. The overall results point to heterogeneous co-movements of demand and supply-side shocks, with several countries displaying negative or very low correlations with the benchmarks and an increasing tendency towards asymmetry, especially on the demand side. Specialization appears to contribute negatively to the symmetry of demand shocks, but positively on the supply side, which can be explained by the spread across countries of technological spillovers. In addition, the results also show that intra-industry trade has contributed positively to a more symmetric spread of demand shocks through aggregate spending spillovers. Since trade in the Eurozone is mainly of the intra-industry type, these results support the occurrence of a Frankel-Rose endogeneity effect.

Keywords: EMU; demand shocks; supply shocks; trade intensity; intra-industry trade; specialization; symmetric shocks; business cycle synchronization; technological spillovers. (search for similar items in EconPapers)
JEL-codes: F10 F11 F14 F44 F45 L81 (search for similar items in EconPapers)
Date: 2023-06
New Economics Papers: this item is included in nep-eec and nep-int
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