Stefaan IDE NBB, 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. Growth1.1Labour supply 1.2TFP 2. Policy2.1Monetary policy (real short-term interest rate) 2.2Fiscal policy (structural primary balance) 3. Trade3.1Intra-area degree of openness versus extra-area degree of openness 3.2Intra-industry trade (Intra-EMU) 3.3Product 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 , , "core""periphery" BE, DE, FR, IT, PT, FI ES, ATEL, 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

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)

PP 10 The data NiGEM , 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 → 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: , ,

PP 14 Historical impact of symmetric and asymmetric shocks on annual growth 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

PP 17 Growth: second form of asymmetry

PP 18 Inflation: first form of asymmetry

PP 19 Inflation: second form of asymmetry

PP 20 Impact of asymmetric shocks on growth and inflation ( ) 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 :  asymmetric shocks, although decreasing, are still not negligible: average impact of 1 percentage point on growth and inflation