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Volatility of industrial production growth and characteristics of optimal currency areas in EU-12 countries

Valentyna Ozimkovska ()
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Valentyna Ozimkovska: University of Kiel

International Economics and Economic Policy, 2016, vol. 13, issue 4, No 6, 563-591

Abstract: Abstract This paper investigates how the introduction of the euro in the EU-12 countries influenced the short-term volatility of output, measured by the volatility of industrial production growth. It assesses whether more favorable criteria of optimum currency areas keep the volatility of industrial production growth constant. Finally, it investigates the impact of the global financial crisis on the volatility of industrial production growth and on the characteristics of the optimum currency areas of the EU-12 countries. This paper uses the Chow breakpoint test and the Quandt-Andrews test to check for structural breaks in the volatility obtained from ARMA (p,q) and AR(p)-EGARCH(1,1) models. The results suggest that after the introduction of the euro, the volatility of industrial production growth has not significantly changed in Austria, France, Luxembourg, the Netherlands and Spain. However, the volatility of industrial production growth did increase in Finland, Ireland, Italy, Luxembourg and Portugal after the adoption of the common currency. In Germany and Greece the volatility of industrial production increased after 2002 and 1997 respectively. This observation cannot be connected directly to the introduction of the euro. After the beginning of the financial crisis, the volatility of industrial production growth increased in all EU-12 countries except France and Greece. Criteria for optimum currency areas fail to explain why the volatility of some EU-12 countries remained unchanged after the introduction of the euro and after the start of the financial crisis. Those countries, where the volatility of industrial production has not changed significantly after the introduction of the euro, had a long history of fixed or pegged exchange rate regimes. This group of countries recovered faster after the financial crisis.

Keywords: Euro; Structural break; Volatility; Industrial production; Theory of optimum currency areas (search for similar items in EconPapers)
JEL-codes: E52 E23 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1007/s10368-015-0312-4

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