EMU: some unanswered questions

Moreover, other fact, which would be even more worrying, is that those regions with a higher
variance of output have also experienced a lower output growth rate than the average (see
figure 5). This fact would imply that regions with a higher variance of output (higher response
to a monetary shock) grow less than the average. This result is consistent with the empirical
evidence obtained by Laxton et al. (1995) for G-7 countries. However, the relationship
between both facts is not probably as simple as it has been stated, so future research should be
done to clarify this point.

Figure 5. Relationship between the average GAV growth rate and the GAV growth rate
standard deviation

GAV growth rate st. dev.

GAVgr = 0,14 - 0,72∙GAVsd + e R²=0,22
(0.02) (0.33)

Other relevant aspect that has to be considered is what has happened to prices in regions with
a higher relative response. In this case, there is not a clear agreement on what happens with
regional inflation where the response to monetary shocks is higher than the rest. Following
classical theories, the response of prices to a monetary shock will be instantaneous. In fact,
the movements of prices in regions with a higher response to monetary shocks should be
higher than in the rest (in a similar way to output variations). So, if this view were true, one
would expect that the variance of inflation in regions with higher response would be higher
than in the rest. However, following (neo) keynesians theories, the existence of rigidities and
different responses of prices will make unclear the previous prediction. Other factor that
should be taken into account is the possibility that prices react more quickly to expansive

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