20.1: Currency Unification and Exchange Rate Uncertainty
Has the Economic and Monetary Union decreased exchange rate uncertainty for non-member countries
too? Graph the $/Deutschmark volatility in the years prior to the establishment of the Economic
and Monetary Union from 1992-1999. Then graph the $/euro rate since. To measure volatility,
calculate the percent change in the rate on a monthly basis （like in Figure 14-11） or the standard
deviation of the monthly rates over time.
Data: The Federal Reserve System has exchange rate data at
http://research.stlouisfed.org/fred2/categories/15.
20.2: Inflation Convergence
Figure 20-2 shows considerable inflation convergence among the EMS countries. Did other countries
follow a similar pattern despite not being part of the EMS? In other words, could global
macroeconomic trends have caused some of the similarities in inflation rates. Graph data for
Germany （as the baseline in the EMU）, the U.K., Sweden, Switzerland, the U.S., Canada, Japan,
and any other desired country.
Data: The Bureau of Labor Statistics has CPI data for these countries at
http://data.bls.gov/cgi-bin/surveymost?in.
20.3: Optimal Currency Area Theory
Optimal currency area theory predicts that benefits and losses of being in a currency area or
union depend on the degree of economic integration between countries that could form the union.
Of course, one measure of integration is the amount of trade. Compare the amount of trade among
EMU countries and exports from EMU countries to non-EMU countries. What fraction of exports
relative to GDP from EMU countries are sent to fellow EMU countries? Does it appear that some
countries are better suited for being part of the EMU than others?
The countries in the EMU are: Germany, France, Italy, the Netherlands, Belgium, Portugal, Spain,
Finland, Austria, Ireland, Greece, Luxembourg, Malta, Cyprus and Slovenia.
Data:The Eurostat site http://epp.eurostat.ec.europa.eu/pls/portal/ddis.go_home?p_language=en
has data for the above countries. For the exports of each country, select "External Trade," then
"Data," and then "External trade detailed data," "Access Database," and "EU27 Trade Since 1995
By CN8." Select the appropriate countries and exports then download the data in a spreadsheet
file. For GDP, select "Economy and Finance," "Tables," "National Accounts," "GDP and main
aggregates," and "Gross domestic prices at market prices".
20.4: Cross-Border Unemployment
As the EMS countries moved towards the Economic and Monetary Union, labor markets were intended
to become more integrated and macroeconomic policies were supposed to become more similar. Did
unemployment rates in the EU and EMU countries become more similar over time? If so, labor markets
would have become more similar even if workers were not completely mobile across countries. If
not, the optimal currency area theory predicts that the loss of the exchange rate as an adjustment
tool may be costly. Graph the unemployment rates for Belgium, Denmark, France, Germany, Italy,
Netherlands, Spain, Sweden, and United Kingdom from 1993-2005. You can also calculate the standard
deviation across countries each year to determine if the variability in unemployment rates across
countries has become smaller over time.
Data: Data: The Bureau of Labor Statistics website http://data.bls.gov/cgi-bin/surveymost?in has
unemployment rates for these countries
20.5: Interest Rates in the EMU
Go to Application 17.1 and redo the exercise for the years 1989-2005. Now that the Economic and
Monetary Union has been formed between France, Italy, Germany and other countries, are their
interest rates the same or nearly the same? What about interest rates in the U.K. versus those
in the EMU?
Data: Interest rate data are available in the file macromonthly.xls that was generously provided
by the International Monetary Fund. For the unemployment rates in various countries, use the Bureau
of Labor Statistics website at http://data.bls.gov/cgi-bin/surveymost?in.
20.6: Optimal Currency Areas and the United States
Are the 50 states in the U.S. an optimal currency area? We can partially answer this question
by testing whether inflation and unemployment rates are uniform across states or regions.
a. Graph regional inflation rates from 1978-2005 （and use the nationwide inflation rate
as a reference） and calculate the standard deviation of the inflation rate each year.
Compare your answers with those in Application 20.2.
b. Graph unemployment rates by state from 1978-2005 for the following states: California,
Texas, Massachusetts, New York, Florida, Michigan, Colorado, Illinois, and Virginia
and other states that you may like.
Data: The Bureau of Labor Statistics site http://www.bls.gov/data/top20.htm has data on inflation
rates and unemployment rates. Go to the bottom of the page （Regional Resources） and select the
icon on the right of for each of the regions. You will find both CPI by region and unemployment
by state.