EUROPEAN ECONOMY - Enterprise Europe Network

The Impact of the Euro on InternationalStability and Volatility 1Stefan GerlachInstitute for Monetary and Financial StabilityUniversity of Frankfurt and CEPRMathias HoffmannInstitute for Empirical Research in Economics, University of ZurichMarch 2008Abstract:We investigate the impact of EMU on macroeconomic volatility. The volatilities of inflationand nominal interest rates have declined, as has, more importantly, the volatility of realconsumption growth. Since global volatility has fallen for reasons unrelated to EMU (thegreat moderation), we focus on the volatilities of bilateral differences in growth rates (orchanges). Pairs of EMU countries have experienced the greatest fall in consumption volatility,followed by pairs in which one country is an EMU member. We demonstrate that thesefindings are closely linked to changes in consumption risk sharing. Overall, EMU has made adifference.Key words: EMU, macroeconomic volatility, euroJEL classification: E42, F411 We thank Richard Portes for suggesting the topic of this paper and our discussant AndréSapir as well as Moreno Bertoldi, Björn Doehring, Heliodoro Temprano and participants atthe Euro@10 conference for their comments and suggestions. Lobsang Tshering providedexcellent research assistance. Any errors are our own.