The dynamics of core and periphery in the European monetary union: A new approach

Nauro F Campos,Corrado Macchiarelli

doi:10.1016/j.jimonfin.2020.102325

Abstract

Despite numerous studies about core-periphery in monetary unions, few focus on their dynamics. This paper (i) presents new theory-based, continuous and dynamic measures of the probability of a country being classified as core or periphery; (ii) estimates the determinants of the changes in this probability over time and across countries; and (iii) uses the Phillips-Sul convergence panel framework to investigate the behaviour of core and periphery groups over time. Our main results indicate that the post-EMU decrease of the core-periphery gap that we document was mainly driven by the adoption of the euro and by increasing competition (lower mark-ups).

Highlights

The European Single currency just commemorated its twentieth anniversary
This paper makes three main contributions: (a) to put forward a new conceptual framework that aims at locating countries along a core-periphery continuum, (b) to construct a dynamic theory-based measure of these distances so that one can assess the evolution of the core-periphery dynamics, and (c) to identify, based on the theory of endogenous Optimal Currency Areas, the main factors that explain the evolution of core and periphery before and after the establishment of the currency union. We study these issues in the context of the European Economic and Monetary Union (EMU)
We find that trade openness and, to a lesser extent, foreign direct investment, help ‘‘import competition” and, in so doing, substitute for regulations: imports increase the probability of a country being classified as core

Summary

Introduction

The European Single currency (the euro) just commemorated its twentieth anniversary. Despite widespread recognition of the importance of issues related to the existence of core and periphery groups and the distance or imbalances between them (De Grauwe, 2018), the vast majority of the existing research uses a static approach. We mean that existing studies identify which countries are members of the core and the periphery but they do not throw light on the how the probability of being classified as core or periphery evolves or changes over time. This is the main contribution of this paper.

Objectives

Findings

Discussion

Conclusion