Is Europe converging to optimality? On dynamic aspects of optimum currency areas

Abstract

This paper investigates whether Europe is converging towards becoming an optimum currency area. To this end, a structural vector autoregression with exclusively long‐run exclusion restrictions is employed on European bilateral real exchange rates, relative CPIs and real output to compare the incidence of the underlying shocks to aggregate supply, aggregate demand and the money market over time. Inferences on historical convergence are drawn for the EU15, the 11 countries originally participating in the European Monetary Union (EMU11) and the original members of the exchange rate mechanism of the EMS (EMS6). The results indicate significant convergence across the EU.

Citation

Kempa, B. (2002), "Is Europe converging to optimality? On dynamic aspects of optimum currency areas", Journal of Economic Studies, Vol. 29 No. 2, pp. 109-120. https://doi.org/10.1108/01443580210420772