2. 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

3. 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)

4. 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

5. 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, ATEL, IR →problems of inconclusiveness, ranking, inconsistency,... (Tavlas (1994), Mongelli (2002))

6. 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

7. 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

8. PP 8 Two forms of asymmetries i)first form: importance of symmetric versus asymmetric shocks ii)second form: difference in reaction to symmetric shocks

9. 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)

10. 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

11. 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)

12. PP 12 Adjusting inflation for a logistic trend: the euro area → limited sensitivity to the choice of end points

13. 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

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

15. PP 15 Two forms of asymmetries i)first form: importance of symmetric versus asymmetric shocks ii)second form: difference in reaction to symmetric shocks

16. PP 16 Growth: first form of asymmetry

17. PP 17 Growth: second form of asymmetry

18. PP 18 Inflation: first form of asymmetry

19. PP 19 Inflation: second form of asymmetry

20. PP 20 Impact of asymmetric shocks on growth and inflation (1993-2000) AT FR NL DE IT GR FI IE PT ES BE Inflation Growth

21. 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