Relative Prices and Economic Adjustment in the United States and the European Union: A Real Story about EMU

Structural vector autoregressions are used to analyze the relationship between real output and relative prices within the European Union and the United States. Relative price variability appears to be more important for adjustment within the European Union than in the United States, reflecting the lower integration of goods and factor markets. In the absence of higher market integration, the lower relative price variability implied by the introduction of a single currency in the European Union could well cause significant economic disruption.