DP646 Is There a Conflict Between EC Enlargement and European Monetary Unification?

Author(s): Tamim Bayoumi, Barry Eichengreen
Publication Date: May 1992
Keyword(s): EC Enlargement, EFTA, EMU
JEL(s): F3
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=646

Recent proposals for enlarging the European Community to include the EFTA countries raise the question of whether the new members should participate in a European Monetary Union. In part, the issue hinges on the incidence of aggregate supply and demand disturbances. We use data on prices and output and a VAR decomposition to analyse this issue empirically, grouping economies according to the magnitude of the disturbances, their cross-country correlation, and speeds of response. We distinguish an EC `core' (Germany and its immediate neighbours) and an EC periphery (UK and the Southern European members of the Community). Austria, Sweden and Switzerland display more similarity to the EC core than do Finland, Iceland and Norway. This suggests that the case for EMU participation is stronger for Austria, Sweden and Switzerland than for the other EFTA countries.