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Is Europe an optimum currency area?∗

Symmetric versus asymmetric shocks in the EC

Published online by Cambridge University Press:  26 March 2020

Guglielmo Maria Caporale
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Extract

Much of the debate on the desirability of a monetary union in Europe has focused on the question of whether Europe can be described as an optimum currency area (OCA). The European Commission in its report ‘One money, one market’ takes the view that this theoretical framework gives useful insights for the analysis of the economics of EMU and its potential costs and benefits, even though it is not decisive, but it has to be complemented by other approaches. Many studies have tried to provide an answer to the topical question of the optimality of introducing a single currency, adopting different research strategies. This note explains why a knowledge of the nature of the shocks is crucial to evaluating the potential costs of creating a monetary union, and applies a statistical technique known as principal components analysis to distinguish between common and country-specific shocks. After surveying the existing literature on OCAs, we present some new empirical results which confirm the relative importance of asymmetric shocks in the Community. A well-functioning monetary union could require some instruments for adjusting to shocks of this kind, for example fiscal transfers across the member countries.

Type
Articles
Information
National Institute Economic Review , Volume 144 , May 1993 , pp. 95 - 113
Copyright
Copyright © 1993 National Institute of Economic and Social Research

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Footnotes

∗

I would like to thank Ray Barrell and Nicholas Oulton for helpful comments and suggestions.

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