Editorial
On the occasion of the 65th birthday of Governor Klaus Liebscher and in recognition of his commitment to Austria’s participation in European monetary union and to the cause of European integration, the Oesterreichische Nationalbank (OeNB) established a “Klaus Liebscher Award”. It will be offered annually as of 2005 for up to two excellent scientific papers on European monetary union and European integration issues. The authors must be less than 35 years old and be citizens from EU member or EU candidate countries. The “Klaus Liebscher Award” is worth EUR 10,000 each. The winners of the third Award 2007 were Harald Badinger and Gert Peersman. Gert Peersman’s winning paper is presented in this Working Paper, while Harald Badinger’s contribution is contained in Working Paper 135.
In this paper, Gert Peersman shows how a simple model with sign restrictions can be used to identify symmetric and asymmetric supply, demand and monetary policy shocks in a twocountry structural VAR. The results can be used to deal with several issues that are important in the OCA-literature. Whilst the method can be applied to many countries, the author provides evidence for the UK versus the Euro Area which is compared versus the US as a benchmark. An important role for symmetric shocks with the Euro Area in explaining UK output fluctuations is found. However, the relative importance of asymmetric shocks, being around 20 percent in the long-run, cannot be ignored. In contrast, the degree of business cycle synchronization seems to have been higher with the US. Moreover, the historical average reaction of the policy rate to symmetric aggregate demand shocks was stronger in the UK than the Euro Area. The paper also confirms existing evidence of the exchange rate being an important independent source of shocks in the economy.