Abstract
Observing the statistical relationship between business cycles correlation and trade intensity in the European Union, euro zone, and the Portuguese economy, we conclude that there is, in general, a positive effect that supports the endogeneity argument proposed by Frankel and Rose (The Economic Journal 108(449):pp. 1009–1025, 1998). However, if we analyse this relationship in sub-periods – 1967–1975, 1976–1985, 1986–1992, and 1993–2003 – we conclude that endogeneity hypothesis just hold in the first two, although the correlations are increasing. This could mean that, after the Single European Act in 1986, other forces beyond trade are contributing to business cycle synchronization. The Portuguese business cycle correlation with the European Union and the Euro zone had also increased in these four decades, despite the fact that endogeneity hypothesis is at a 90 percent confidence level. We also analyse the bilateral relationships between the Portuguese economy and the other European Union countries and find that the endogeneity is confirmed in just four cases: Spain, Ireland, Netherlands, and UK.
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Notes
The reference presented in this paper dates back to 1998 because we are considering the publication of the article in The Economic Journal. However, Frankel and Rose first published the text in 1996 as a NBER paper.
Rose (2004) provides an extensive review of these results.
Chelem Database has aggregate trade statistics to Belgium and Luxembourg.
Hodrick and Prescott (1980). Filters are used, and H–P is only the most common between several others, to extract the cyclical component from the series. This it is obtained solving the following minimization problem in order to \( x^{*}_{t} \):
$$ {\mathop {{\text{Min}}}\limits_{x^{ * }_{t} } }{\sum\limits_{t = 1}^T {{\left( {x_{t} - x^{ * }_{t} } \right)}} }^{2} + \lambda {\sum\limits_{t = 1}^T {{\left( {{\left( {x^{ * }_{{t + 1}} - x^{ * }_{t} } \right)} - {\left( {x^{ * }_{t} - x^{ * }_{{t - 1}} } \right)}} \right)}^{2} } } $$Exogenous variables are correlated with a random error term.
Rose (2000) presents a revision of gravity models literature.
The United Kingdom, Denmark, and Sweden are not in EMU. Euro zone: Portugal, Spain, France, Belgium, Luxembourg, Holland, Germany, Austria, Italy, Greece, Finland, and Ireland. As we said previously, the Chelem database presents aggregate statistics for Belgium and Luxemburg.
We are considering the 15 European countries before the last enlargement.
We make Hausman tests that confirmed the endogeneity hypothesis and suggested the use of 2SLS estimation.
In this case, we cannot use instrumental variables estimation, unlike the estimates presented in the previous section, when we use common border, common language, and distance as instrumental variables.
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Silvestre, J., Mendonça, A. The Endogeneity of Optimum Currency Areas Criteria: Some Evidence from the European Union and Portugal. Int Adv Econ Res 13, 1–18 (2007). https://doi.org/10.1007/s11294-006-9056-9
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DOI: https://doi.org/10.1007/s11294-006-9056-9
Keywords
- economic and monetary union (EMU)
- business cycles correlation
- optimum currency areas
- international trade