Price-level co-movements within currency unions : An alternative integration metric

Gregory W. Whitten*

*Corresponding author for this work

Research output: Journal PublicationsJournal Article (refereed)

Abstract

This paper analyses currency union integration by testing whether price levels in member countries possess a common stochastic trend. The trace statistic test for cointegration proposed by (Johansen, 1995) demonstrates the presence of such a trend for most unions. A disaggregated analysis identifies a common stochastic trend for several though fewer than half of country pairs within a union. Some unions such as the Eurozone have small shares of cointegrated country pairs. Yet, the share of cointegrated country pairs is large relative to countries outside currency unions. Comparison to a control group (country pairs where one country belongs to a given union and the other country does not) indicates that the cointegration found within a currency union is a union-specific trait and not a feature of the individual countries within the union. These results provide an alternative metric to intraunion trade for gauging the extent of currency union integration.

Original languageEnglish
Pages (from-to)2414-2438
Number of pages25
JournalWorld Economy
Volume41
Issue number9
Early online date4 Mar 2018
DOIs
Publication statusPublished - Sep 2018

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Keywords

  • currency union
  • inflation
  • integration

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