Are optimum currency area (OCA) theory criteria endogenous to regime change?: the case of the economic and monetary union (EMU) before and after 1999

摘要

The study aims to establish whether or not the Optimum Currency Area (OCA) theory criteria are endogenous to regime change. To reach this aim I used data on eleven of the Economic and Monetary Union (EMU) countries, the United Kingdom (UK) and the United States (US), and I investigate two linked issues: the first is related to the OCA preconditions and it addresses the questions: if and to what extent the EMU members had satisfied the fulfilment OCA theory criteria before they joined the EMU; the second is related to the working of an OCA and it addresses the question of whether or not EMU membership has prompted a process of endogenous convergence. In particular, I examine whether adjustments have taken place through real wages or unemployment channels both before and after the establishment of the EMU in 1999 and the extent of convergence between the EMU members. I compare the findings of the EMU members versus the two non-EMU countries: the UK and the US. The comparison is carried out using two sets of indicators, each of which measures different aspects of OCA dimensions: the first set of indices measures the degree of convergence/divergence reached before and after 1999 and the extent of the endogenous convergence process prompted by the OCA; this set includes indices such as the correlation coefficient, the cross-country coefficient of variation, the asymmetry index and the persistence index. The second set of indicators comes from the econometric estimates and analysis of vector error correction and reduced-form VAR models, impulse response functions and variance decomposition; these indicators enable me to compare the responses of each national economy to relative demand, relative supply and policy shocks, and to compare the time persistence of these responses before and after the EMU. These indicators also allow identifying differences across the EMU national economies in terms of degree of convergence and divergence pre and post OCA. From these examinations I conclude that: (i) before 1999, the EMU members did not satisfy a large number of the OCA pre-requisites even though these economies tended to be more compliant with such criteria than non EMU countries such as the UK and the US; (ii) before 1999, there was an evident difference in the degree of OCA-compliance between a core group of members consisting of Germany, Italy, France and the Netherlands and a peripheral group consisting of Belgium, Ireland, Austria, Finland, Greece, Portugal and Spain; (iii) the establishment of the EMU has constituted a regime change that instigated an endogenous convergence process for some but not all of the EMU members, particularly in the labour market for countries such as Austria, Belgium, Finland, Germany, Ireland, Portugal and Spain mainly due to policy coordination; (iv) the process of endogenous convergence has been stronger and faster with respect to business cycle and the competitive index, with a discernible tendency for the nominal rather than real adjustment in international trade and the labour market variables; (v) however, the evidence of endogenous convergence has not been strong enough to eliminate differences between the core and peripheral members of the EMU – mainly because of faster convergence across the former group relative to the latter and because of more nominal rather than real channel-based adjustments across countries.