Stefaan IDENBB, research department

The views expressed in this paper are those of the authors and do not necessarily reflect the views

of the National Bank of Belgium.

Rethymno, August 2003

EMU workshop: Prospects & Challenges

PP 3

Scope of asymmetries in the euro area

Part 1: descriptive analysis

→ core & periphery

Part 2: quantitative analysis (SVAR approach)

→ countries spread along a line

(today: emphasis on part 2)

PP 4

Part 1: The potential or likelihood for asymmetries w.r.t. the euro area by looking at a range of indicators

1. Growth 1.1 Labour supply

1.2 TFP

2. Policy 2.1 Monetary policy (real short-term interest rate)

2.2 Fiscal policy (structural primary balance)

3. Trade 3.1 Intra-area degree of openness versus

extra-area degree of openness

3.2 Intra-industry trade (Intra-EMU)

3.3 Product Composition of Exports

PP 5

Part 1: The potential or likelihood for asymmetries w.r.t. the euro area by looking at a range of indicators

Method: 1) differences with respect to the euro-area

2) 3 subperiods 1970-1980, 1981-1990, 1993-2000

1993-2000

"core" "periphery"

BE, DE, FR, IT, PT, FI

ES, AT EL, IR

→ problems of inconclusiveness, ranking, inconsistency,... (Tavlas (1994),

Mongelli (2002))

PP 6

Part 2: Quantitative approach

correlation measures of business cycles

(cycle-trend approach; # filters, cluster analysis, ...)

type and incidence of shocks

approach that concentrates on shocks and their

transmission, and the cyclical patterns that result

inspired by the Bayoumi & Eichengreen approach

PP 7

Our SVAR-approach

i) euro-area variables are included together with country

variables

clear definition of symmetric / common

(monetary policy for the euro-area as a whole)

ii) one VAR per country

iii) both growth and inflation asymmetries are analyzed

specificcountrydemand

specificcountrysupply

commondemand

commonsupply

44434241

34333231

24232221

14131211

i

.i

.

areaeuro

.

areaeuro

.

ε

ε

ε

ε

(L)a(L)a(L)a(L)a

(L)a(L)a(L)a(L)a

(L)a(L)a(L)a(L)a

(L)a(L)a(L)a(L)a

p

y

p

y

PP 8

Two forms of asymmetries

i) first form: importance of symmetric versus asymmetric shocks

ii) second form: difference in reaction to symmetric shocks

PP 9

Identification: two sets of long-run restrictions

1) symmetric (common) versus asymmetric (country-specific)

shocks

euro-area output and price levels are only affected by

symmetric shocks

2) demand versus supply shocks

Blanchard & Quah (1989)

0 1a(1)a1a1a 24231413

0 1a 1a1a 343212

PP 10

The data

NiGEM

1970-2000, quarterly basis

dummy for German reunification in German VAR

GDP ~ I(1)

some cointegration but same model accross countries

inflation ~ I(2) in most cases

PP 11

Adjusting (non-stationary) inflation

Gerlach & Svensson (2001): "The gradual decline of inflation

could be interpreted as a fall in the average (implicit) inflation

objective of the central banks"

→ use of flexible trend (logistic function)

PP 12

Adjusting inflation for a logistic trend: the euro area

-1

0

1

2

3

41

97

0

19

75

19

80

19

85

19

90

19

95

20

00

observed inflation trend-adjusted inflation trend (implicit inflation target)

→ limited sensitivity to the choice of end points

PP 13

Empirical results

Symmetric asymmetric versus demand supply

trade-off: clearness versus loss of information

Synthetic tool: "Cumulative historical effects"

= (shock x impulse response function)

to be able to distinct 3 subperiods: 1970-1980, 1981-1990,

1993-2000

PP 14

Historical impact of symmetric and asymmetric shocks on annual growth

-14

-12

-10

-8

-6

-4

-2

0

2

4

6

71 73 75 77 79 81 83 85 87 89 91 93 95 97 99

Symmetric Asymmetric

-6

-4

-2

0

2

4

6

71 73 75 77 79 81 83 85 87 89 91 93 95 97 99

France

Finland

PP 15

Two forms of asymmetries

i) first form: importance of symmetric versus asymmetric shocks

ii) second form: difference in reaction to symmetric shocks

PP 16

Growth: first form of asymmetry

Table 2a - Criterion 1: impact of symmetric versus asymmetric shocks on annual growth (= first form of asymmetry)

(absolute impact of the symmetric or asymmetric shocks, percentages, average per sub-period)

Symmetric shocks Asymmetric shocks 1971-1980 1981-1990 1993-2000 1971-1980 1981-1990 1993-2000

BE 1.9 1.3 1.1 1.1 0.9 1.0 DE 1.9 1.0 0.9 0.9 1.0 0.5 FR 1.4 0.9 0.9 0.5 0.7 0.4 IT 1.4 1.1 1.2 1.8 0.9 0.7 ES 1.9 1.2 1.0 1.5 0.8 0.8 NL 1.7 1.0 0.8 1.0 1.2 1.0 PT 2.5 2.1 1.5 1.8 1.4 1.3 AT 1.7 0.9 0.9 1.3 1.1 0.8 IE 0.7 0.5 0.4 1.8 1.9 3.5 FI 0.7 0.6 0.5 2.5 1.4 2.0 GR 1.2 1.7 1.3 2.1 1.5 0.9 Euro area 1.6 1.0 0.9 0.0 0.0 0.0 Average: all countries 1.6 1.1 0.9 1.5 1.2 1.2 all countries

except FI and IE

1.3 1.0 0.8

PP 17

Growth: second form of asymmetry

Table 2b - Asymmetric impact of symmetric shocks on annual growth (= second form of asymmetry)

(absolute difference between the impact of the symmetric shocks on a country and the impact of the symmetric shocks on the euro area, percentages, average per sub-period)

1971-1980 1981-1990 1993-2000 BE 0.4 0.5 0.2 DE 0.4 0.3 0.3 FR 0.3 0.2 0.1 IT 0.4 0.3 0.3 ES 0.8 0.4 0.2 NL 0.4 0.5 0.4 PT 1.1 1.1 0.6 AT 0.4 0.2 0.2 IE 1.0 0.6 0.6 FI 1.0 0.6 0.6 GR 1.1 0.9 0.6 Average 0.7 0.5 0.4

PP 18

Inflation: first form of asymmetry

Table 3a - Criterion 1: impact of symmetric versus asymmetric shocks on annual inflation (= first form of asymmetry)

(absolute impact of the symmetric or asymmetric shocks, percentages, average per sub-period)

Symmetric shocks Asymmetric shocks 1971-1980 1981-1990 1993-2000 1971-1980 1981-1990 1993-2000

BE 1.3 1.3 0.6 1.4 1.0 0.4 DE 0.7 0.6 0.3 0.5 0.4 0.7 FR 1.2 1.2 0.6 0.5 0.5 0.3 IT 2.6 2.7 1.5 1.5 0.9 1.1 ES 1.2 0.9 0.5 2.8 1.3 1.0 NL 0.7 0.8 0.3 0.8 0.7 0.5 PT 2.4 2.2 1.1 3.0 3.0 1.4 AT 0.5 0.6 0.2 1.2 0.6 0.5 IE 1.0 1.0 0.5 2.6 2.0 2.3 FI 1.4 1.0 0.6 2.3 1.2 1.0 GR 1.8 2.8 1.1 2.0 1.9 1.7 Euro area 1.2 1.3 0.7 0.0 0.0 0.0 Average: all countries 1.3 1.4 0.7 1.7 1.2 1.0 all countries

except FI and IE

1.5 1.2 0.8

PP 19

Inflation: second form of asymmetry

Table 3b - Asymmetric impact of symmetric shocks on annual inflation (= second form of asymmetry)

(absolute difference between the impact of the symmetric shocks on a country and the impact of the symmetric shocks on the euro area, percentages, average per sub-period)

1971-1980 1981-1990 1993-2000 BE 0.5 0.5 0.3 DE 0.6 0.7 0.4 FR 0.3 0.2 0.1 IT 1.5 1.4 0.9 ES 0.8 0.5 0.3 NL 0.6 0.5 0.4 PT 1.5 1.0 0.7 AT 0.7 0.7 0.5 IE 1.0 0.5 0.5 FI 0.8 0.5 0.5 GR 1.3 1.5 0.7 Average 0.9 0.7 0.5

PP 20

Impact of asymmetric shocks on growth and inflation(1993-2000)

0

1

2

3

4

0 1 2 3 4

AT

FR

NL

DE

IT

GR

FI

IE

PT

ES

BE

Inflation

Growth

PP 21

Conclusion

Growth:

symmetric shocks were the main cause of fluctuations in a majority of countries

few differences with the euro area in the reaction to these symmetric shocks

asymmetric shocks were invariably the most important factor underlying the

asymmetries in growth patterns

Inflation:

asymmetric shocks were the main source of inflation fluctuations in most countries

1993-2000:

asymmetric shocks, although decreasing, are still not negligible: average impact of

1 percentage point on growth and inflation