How homogenizing are monetary unions? Evidence from the U.S. states

How much should we expect monetary integration to reduce differences among participating economies? Using data for the 50 U.S. states over 1929–1999, the paper finds that large differences across states persist in both business-cycle variability and correlations of state income with the U.S. as a whole. It is also shown that about a third of a state’s business-cycle volatility is explained by its income correlation with the entire U.S. Since these results hold for the U.S., a monetary union of long history and deep economic integration, the obvious implication is that volatility and correlation differences should be expected to persist to an even greater extent in more recent and less economically integrated monetary unions, such as the Eurozone or a prospective set of dollarized national economies. © 2003 Elsevier Inc. All rights reserved. JEL classification: E42; F33; F36; F42