Is the United States an optimum currency area? An empirical analysis of regional business cycles
This paper develops a statistical model to study the business cycles of the eight U.S. BEA
regions. By combining unobserved component and VAR techniques I identify not only common
and idiosyncratic sources of innovation, but also common and idiosyncratic responses to common
shocks. Using this model, I show, at the usual levels of statistical significance, that U.S. regions
deviate significantly from Mundell’s notion of an optimum currency area. I identify five core
regions that have similar sources of disturbances and responses to disturbances (New England,
Mideast, Great Lakes, Rocky Mountains and Far West) and three non-core regions that differ
significantly from the core in their sources of disturbances and/or responses to disturbances
(Southeast, Plains and Southwest), at business cycle frequencies.