Does competition explain core-periphery dynamics in currency unions? The distances between core and periphery countries are often estimated from binary time-invariant classifications relying mostly upon demand, not supply disturbances. This research derives new dynamic continuous (not binary) theory-based measures by explicitly modeling supply shocks as over-identifying restrictions. Using the Phillips-Sul method (Econometrica 2007), the research identifies hard-core, soft-core and periphery groups and asks how these change over time. It finds the core-periphery divide in Europe weakens after 1992. It estimates that competition (flexible product market regulations or imports) and euro adoption significantly decrease the likelihood of countries being classified as peripheral.
