Endogenous symmetry of shocks in a monetary union

The monetary union issue, when assessed with the traditional inferences for optimal currency areas, misses an important dimension. Increased specialis ation induced by reduced transaction costs, suggested by Krugman's "lessons of Massachusetts", is only a part of the story. Even if agglomeration and inter-industry trade may occur as a result of reduced transaction costs, th is tendency may be counteracted by the elimination of uncertainty associate d with bilateral exchange rate variability within the monetary union. Thus, in contradiction to what is generally assumed on the basis of the red uction in transaction costs only, the European Monetary Union (EMU) is like ly to foster intra-industry trade in Europe, leading to more symmetric shoc ks between member states. The monetary union will endogenously create the c onditions of its success. Empirical evidence is provided for EU countries' bilateral trade over the period 1980-1994, using disaggregated trade data.