Relative Prices and Economic Adjustment in the U.S. and the EU: A Real Story About European Monetary Union
IMF Working Papers, June 1, 1994
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- Relative Prices and Economic Adjustment in the U.S. and the EU: A Real Story About European Monetary Union
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Bibliographic details
- Authors: Alun H. Thomas, Tamim Bayoumi
- Published: June 1, 1994
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451848632.001
Summary
- Structural vector autoregressions are used to analyze the relationship between real output and relative prices within the EU and the United States.
- Relative price variability appears to be more important for adjustment within the EU than the United States, reflecting the lower integration of goods and factor markets.
- In the absence of higher market integration, the lower relative price variability implied by the introduction of a single currency in the EU could well cause significant economic disruption.
Key findings and analysis
- Structural vector autoregression methodology applied to compare EU and U.S. dynamics of real output and relative prices.
- Relative price variability is more important for economic adjustment within the EU than within the United States.
- The greater importance of relative price variability in the EU is attributed to lower integration of goods and factor markets compared with the United States.
- A single currency in the EU would imply lower relative price variability; without compensating higher market integration, this reduction could cause significant economic disruption.
Policy implications and scenarios
- Greater market integration of goods and factor markets in the EU is implied as necessary to mitigate potential disruption from reduced relative price variability under a single currency.
- Absence of higher integration raises risk that the introduction of a single currency could lead to significant economic disruption.
Data, methods, and technical scope
- Method: Structural vector autoregressions.
- Subject tags: Currencies, Econometric analysis, Economic integration, Exchange rates, Foreign exchange, Monetary unions, Money, National accounts, Personal income, Structural vector autoregression.
- Keywords include: common currency, Currencies, EMU, EU country, EU country estimate, EU entrant, EU goods, EU result, EU sample period, Europe, Exchange rates, Monetary unions, nominal exchange rate, Personal income, price movement, price response, relative price, Relative prices, Structural vector autoregression, supply curve, WP.