Citation:
[Journal:] International Journal of Finance & Economics [ISSN:] 1099-1158 [Volume:] 30 [Issue:] 4 [Publisher:] John Wiley & Sons, Ltd. [Place:] Chichester, UK [Year:] 2024 [Pages:] 3825-3837
Publisher:
John Wiley & Sons, Ltd., Chichester, UK
Abstract:
The Optimal Currency Area (OCA) literature has been focusing on the co‐movement of business cycle shocks as a key policy criterion. We document in a simple Barro–Gordon framework that, in addition to a high correlation of shocks, a common persistence of shocks is a relevant OCA criterion. The model provides a conceptual underpinning for empirical studies that have used the Serial Correlation Common Features (SCCF) test to evaluate common currency areas. We apply the SCCF test to a set of countries that could potentially introduce the Euro and find for the period from 1999 (Q1) to 2019 (Q3) only little evidence that the acceding countries share a common cyclical response pattern with the European Monetary Union (EMU) aggregate.