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.