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One Money, One Market? - An Empirical Study on the Effect of the Euro on Business Cycle Synchronization

Gullberg, Hilda LU (2018) NEKP01 20181
Department of Economics
Abstract
The theory of optimal currency areas (OCA) states that different regions need to comply to certain criteria in order to benefit from a monetary union (Mundell(1961); McKinnon(1963) and Kenen(1969)). One of the most important OCA properties is similarity between business cycles (Masson and Taylor, 1993, p. 274). In the debate preceding EMU critiques argued that the European countries were subject to different business cycles and therefore not an OCA (Breuss, 2011). Others claimed that Europe, although not an OCA, would experience gains
from a common currency that would outweigh the costs (Emerson et al, 1991, p. 28). There are various theories on how a monetary union affects business cycle synchronization. The endogeneity argument put... (More)
The theory of optimal currency areas (OCA) states that different regions need to comply to certain criteria in order to benefit from a monetary union (Mundell(1961); McKinnon(1963) and Kenen(1969)). One of the most important OCA properties is similarity between business cycles (Masson and Taylor, 1993, p. 274). In the debate preceding EMU critiques argued that the European countries were subject to different business cycles and therefore not an OCA (Breuss, 2011). Others claimed that Europe, although not an OCA, would experience gains
from a common currency that would outweigh the costs (Emerson et al, 1991, p. 28). There are various theories on how a monetary union affects business cycle synchronization. The endogeneity argument put forward by Frankel and Rose (1998) states that business cycle synchronization will increase in a monetary union due to deepened trade relations. According to Krugman (1991) the Eurozone members would experience more idiosyncratic business cycles because of increased specialization. This paper investigates whether the euro has had a significant effect on business cycle synchronization of the Eurozone economies. The analysis is based on annual data from 24 OECD economies spanning 1995 to 2015. The effect of the euro on business cycle synchronization, bilateral trade intensity and specialization patterns are estimated in the context of a system of simultaneous equations. The estimation distinguishes between the effect of the euro on its core and peripheral members. The estimation technique uses instrumental variable techniques and allows for the endogeneity of some of the included variables. The results suggest that the euro has had a positive overall effect on business cycle
synchronization and that there is a tendency for a higher trade intensity among Eurozone economies. The results show no significant difference between the effect of the euro on its core and peripheral members. (Less)
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author
Gullberg, Hilda LU
supervisor
organization
course
NEKP01 20181
year
type
H2 - Master's Degree (Two Years)
subject
keywords
OCA theory, Eurozone, business cycle synchronization, core, periphery
language
English
id
8948875
date added to LUP
2018-07-03 13:36:59
date last changed
2018-07-03 13:36:59
@misc{8948875,
  abstract     = {The theory of optimal currency areas (OCA) states that different regions need to comply to certain criteria in order to benefit from a monetary union (Mundell(1961); McKinnon(1963) and Kenen(1969)). One of the most important OCA properties is similarity between business cycles (Masson and Taylor, 1993, p. 274). In the debate preceding EMU critiques argued that the European countries were subject to different business cycles and therefore not an OCA (Breuss, 2011). Others claimed that Europe, although not an OCA, would experience gains
from a common currency that would outweigh the costs (Emerson et al, 1991, p. 28). There are various theories on how a monetary union affects business cycle synchronization. The endogeneity argument put forward by Frankel and Rose (1998) states that business cycle synchronization will increase in a monetary union due to deepened trade relations. According to Krugman (1991) the Eurozone members would experience more idiosyncratic business cycles because of increased specialization. This paper investigates whether the euro has had a significant effect on business cycle synchronization of the Eurozone economies. The analysis is based on annual data from 24 OECD economies spanning 1995 to 2015. The effect of the euro on business cycle synchronization, bilateral trade intensity and specialization patterns are estimated in the context of a system of simultaneous equations. The estimation distinguishes between the effect of the euro on its core and peripheral members. The estimation technique uses instrumental variable techniques and allows for the endogeneity of some of the included variables. The results suggest that the euro has had a positive overall effect on business cycle
synchronization and that there is a tendency for a higher trade intensity among Eurozone economies. The results show no significant difference between the effect of the euro on its core and peripheral members.},
  author       = {Gullberg, Hilda},
  keyword      = {OCA theory,Eurozone,business cycle synchronization,core,periphery},
  language     = {eng},
  note         = {Student Paper},
  title        = {One Money, One Market? - An Empirical Study on the Effect of the Euro on Business Cycle Synchronization},
  year         = {2018},
}