DP988 Relative Prices and Economic Adjustment in the US and EU: A Real Story About European Monetary Union

Author(s): Tamim Bayoumi, Alun Thomas
Publication Date: July 1994
Keyword(s): Common Currency, EMU, Relative Prices
JEL(s): F15, F33, R11
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=988

Structural vector autoregressions are used to analyse the relationship between real output and relative prices within the European Union (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.