Regional cyclical asymmetries in an optimal currency area: an analysis using US state data

Mark Partridge and Dan Rickman

Oxford Economic Papers, 2005, vol. 57, issue 3, 373-397

Abstract: Two key assumptions are often used in assessing the feasibility of a common currency area (CCA). First, asymmetric shocks increase the costs of forming a CCA. Second, the US represents a useful benchmark for evaluating a potential CCA. Changes in the asymmetry of US regional cycles, however, are rarely examined. Therefore, this study examines the synchronization of US regional business cycles for 1971--98. The results reveal that US state cyclical asymmetries changed over time, with synchronization appearing to decline by the latter 1980s. This suggests that the US was less likely to fit CCA criteria in the 1990s, which conflicts with its apparent successful monetary-policy experience. Yet, this seeming contradiction can be explained by a tradeoff between the volatility of the common-national business cycle and regional synchronization. Given that the volatility of an area's common shock can change regularly, these findings have implications for the assessment of all CCAs. Copyright 2005, Oxford University Press.

Date: 2005
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