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The effect of currency unions on business cycle correlations: the EMU case

Styliani Christodoulopoulou ()

Empirica, 2014, vol. 41, issue 2, 177-222

Abstract: This paper examines empirically the effects of the introduction of the euro on the output correlation among the member economies. The similarity of shocks affecting the members is an important condition to minimize the costs from the loss of national monetary policy implementation. Eichengreen (Economic Policy 10:118–187; 1990 ) pointed that this is an important condition to be satisfied before joining a currency union. Frankel and Rose (Economic J 108:1009–1025 1998 ) state that membership could lead to an ex post rise in output correlations. In the current study, we employ ex post and ex ante data on output for 11 members and 11 non-members of the EMU and we test whether the adoption of the euro increased the output synchronization among members compared to non-members. The main findings of this paper are that there is not robust evidence for a decrease in average correlation among members compared to the co-movement among non-members. Our sensitivity analysis reveals that for a group of countries considered to be the core of the European Union, the effect is statistically insignificant. Any decrease in correlation could be attributed to some extend to the countries of the periphery, and also to some of the countries considered as members of the core, giving credit to Eichengreen (Economic Policy 10:118–187; 1990 ) and Krugman ( 1990 ) arguments about increased specialization giving rise to idiosyncratic shocks. Copyright Springer Science+Business Media New York 2014

Keywords: Business cycle synchronization; Currency union membership; Difference in difference estimation; E32; F15; F33 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (8)

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DOI: 10.1007/s10663-012-9207-6

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