US DOLLAR INDEX OF MACROECONOMIC INTEGRATION
During the Eurozone crisis years (2010 – 2013), many questioned whether the euro could survive as the single currency of 19 MSs. The United States is an economic area comparable in size and population to the Eurozone and therefore provides further insight into the analysis of the functionality of a currency union during and after the crisis years. However, we should note that the US is a long-established monetary area (going back more than 150 years), with both fully functioning banking and fiscal unions. This means that the US has a more integrated fiscal and financial system which therefore ought better to be able to address lateral shocks affecting different regions within the US. We have collated an overall index of monetary integration by comparing four categories (cycle synchronicity, competitiveness, public finances, and monetary dispersion) to analyze macroeconomic convergence or divergence patterns within the USA’s monetary area. Our research takes into account the 50 continental states in the USA plus Washington DC and Hawaii from 1999 to 2019. This time frame is used to allow for a comparison with the Eurozone index. A breakdown of each category is shown in the table below:
With the previously mentioned caveats in mind, it is interesting to note the level of dispersion in the US compared to the Eurozone. Firstly, considering overall dispersion, 2008 saw an increase to 172.95, and within a short time frame the level had increased further to 229.40 in 2010. The dispersion in the US has increased rather gradually over the years and there is no clear pattern of a return to pre-crisis levels. Currently, the overall macroeconomic dispersion in the US has not significantly improved as it stood at 241.50 in 2019.
Sources: U.S Census Government (Deficits, Trade Balance), Bureau of Economic Analysis (GDP, GDP per capita), US government spending (Government Debt), Bureau of Labour Statistics (Inflation, Real Exchange Rate, Labour Costs, Unemployment Rate), M3 Growth Rate, FDIC database (Net Lease and Loans, Real Estate Lease and Loans), St. Louis Fed (ISA balances)
Notes: 1) 50 continental States plus Hawaii and Washington D.C. 2) A higher value on the vertical axis means greater dispersion or less integration.
If we look into dispersion in different categories, we observe that:
(1) Monetary dispersion in the US (including ISA balances) has been quite volatile in the pre-crisis years and has deteriorated since 2017. Even though not as big as in the Eurozone, monetary dispersion in the USA has shown no sign of improvement in the last three years.
(2) Regarding competitiveness dispersion, for the US, dispersion was relatively stable from the years 1999-2013. Even during the crisis years, there was relatively little dispersion. However, since 2013, dispersion in competitiveness has shown a gradual decline. The current value of the index in 2019 is 321.78. Even so, in the Eurozone, figures are much higher, having been in the 900s since 2010, even reaching a figure of close to 1,000 at one point.
(3) As per the business cycle dispersion in the US, the trends are rather similar in both economies. In the US we observe an increase in dispersion in the crisis years but a decreasing trend in dispersion since then, very similar to that observed in the Eurozone after the ‘Euro crisis’ years. In both economies, cycle dispersion is even smaller now than in 1999.
(4) The public finance index has a similar trendline to the business-cycle dispersion. The public finance index in 2019 (54.50) is the least dispersed when compared to other indices.
Notes: 1) We adopt 1999 as the base year for both economies to compare their performance since then, therefore focusing on changes in asymmetry. This does not mean that the level of asymmetries in both areas in 1999 was the same. In both cases, we have displayed the overall index of dispersion without including the Fedwire and Target balances for the USA and the Eurozone economies, respectively. 2) A higher value on the vertical axis means greater dispersion or less integration.
Acknowledgments: We would like to thank the IIMR research assistants for their contribution to the update of the datasets needed to build up our indices; in particular, Shivani Pradhan, Ibrahim Hakim and Alessandro Venieri.
Authorship and how to quote: This is an IIMR project coordinated by Dr Juan Castaneda and based on his research with Professor Pedro Schwartz on this topic:
- ‘How Functional is the Eurozone? An Index of European Economic Integration Through the Single Currency’. October 2017. Economic Affairs 37 (3).
- ‘An optimality index of the single currency: internal asymmetries within the eurozone since 1999’. In Castaneda, Roselli and Wood (eds.): The Economics of Monetary Unions. Past Experiences and the Eurozone. Chapter 7. 2020. Routledge.