DP643 | Shocking Aspects of European Monetary Unification

Publication Date

30/05/1992

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Abstract

Data on output and prices for eleven EC member nations are analysed using a VAR decomposition to extract information on underlying aggregate supply and demand disturbances. The coherence of the underlying shocks across countries and the speed of adjustment to these shocks are compared with the results from US regional data. We find that the underlying shocks are significantly more idiosyncratic across EC countries than across US regions, which may indicate that the EC will find it more difficult to operate a monetary union. A core of EC countries - Germany and her immediate neighbours - experience shocks of similar magnitude and cohesion as the US regions, however. EC countries also exhibit a slower response to aggregate shocks than US regions, presumably reflecting lower factor mobility.