The (A)Symmetry of shocks in the EMU

Abstract

A disadvantage of EMU is the lack of national monetary policy to absorb country-specific shocks. The seriousness of this depends on the availability of alternative adjustment mechanisms, as well as on the asymmetry of the demand and supply shocks within EMU. Previous empirical research on the asymmetry of shocks mainly focused on correlation coefficients between the shocks for some specific period. Therefore, it does not give a proper picture of the development of the symmetry of shocks in the EMU. The aim of this paper is to analyse empirically whether shocks in EMU became more or less symmetric. By using a moving principal component analysis the development of the symmetry of shocks will be much clearer. The results suggest that within EMU the symmetry of demand shocks increased during the last two decades, whilst the symmetry of the supply shocks also rose slightly. This suggested convergence of shocks helps the ECB to determine its monetary stance for the entire Euro zone.

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