CONVERGENCE OF SHOCKS AND TRADE IN THE ENLARGED EUROPEAN UNION

Athina Zervoyianni

Working Paper series from Rimini Centre for Economic Analysis

Abstract: This paper explores the relation between trade flows and cross-country symmetry of supply and demand shocks using data from the EU27 countries. Increased bilateral trade intensity is found to have a positive impact on the correlation of both demand and supply shocks. Intra-industry trade is found to be positively linked to correlations of supply-side shocks but negatively linked to correlation of demand shocks. Our results thus provide support for the argument that aggregate demand spill-overs and intra-industry trade, rather than specialization, dominate in the process through which trade flows affect the cross-country transmission of shocks in Europe. At the same time, our estimates suggest that monetary-policy convergence in Europe (the circulation of the euro), while having increased symmetry of supply-side shocks, has had no direct favourable impact on symmetry of demand shocks. By contrast, the process of fiscal-policy convergence is found to have resulted in more correlated demand shocks across the EU member states.

Keywords: convergence of shocks; trade flows; European integration; cyclical macroeconomic fluctuations (search for similar items in EconPapers)
JEL-codes: E32 F15 F4 (search for similar items in EconPapers)
Date: 2008-01
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Persistent link: https://EconPapers.repec.org/RePEc:rim:rimwps:15_08

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