EMU And The Adjustment To Asymmetric Shocks: The Case Of Italy

Date Added: Dec 2009
Format: PDF

In this paper, the authors address the question on whether EMU has amplified or dampened intra euro area divergences, by looking at a time-varying VAR model of Italy's relative performance compared with the rest of the euro area, spanning from 1976 to 2009. Their main result is that EMU does not appear to have materially changed the transmission mechanism of idiosyncratic demand and cost push shocks, but has removed an importance source of relative performance variability given by idiosyncratic monetary shocks. The net effect of EMU, therefore, has been to reduce the relative performance variability. The conclusions that they reach could be usefully tested on other countries.