Analysis of shocks affecting Europe: EMU and some central and eastern acceding countries

Arfa Ben

doi:10.2298/pan0901021b

Abstract

This paper deals with the synchronization of business cycles and economic shocks between the euro area and acceding countries. We therefore extract the business cycle component of output by using Hodrick-Prescott filter. Supply and demand shocks are recovered from estimated structural VAR models of output growth and inflation using long run restriction (Blanchard and Quah). We then check the (A) symmetry of these shocks by calculating the correlation between euro area shocks and those of the different acceding countries. We find that several acceding countries have a quite high correlation of demand shocks with the euro area however supply shocks are asymmetric; the correlation between euro area and central and east European countries (CEECs) is negative. We therefore conclude that joining the European Monetary Union is not yet possible: central and east European countries have to make structural changes to join the European Monetary Union.

Highlights

Our main objective is to evaluate the correlation of business cycles within the Euro area, between the euro area and acceding countries
- Results: Our results indicate all countries are positively correlated with the euro area business cycle
Business cycles in Hungary, Poland and Slovenia3 seem well correlated with the euro area business cylce; these countries present the highest correlation coefficients

Summary

Introduction

Our main objective is to evaluate the correlation of business cycles within the Euro area, between the euro area and acceding countries. Our investigation on the nature of business cycles and shocks correlation within Europe leads us to the optimal currency areas theory. The main contributions on optimal currency areas theory are those of Mundell (1961), Mckinnon (1963) and Kenen (1969), considered the base of subsequent studies. Their objective was to identify the main criteria of a possible integration of a country to a monetary area. If benefits for each country wishing integration are positive and higher than costs, monetary area is called as optimal

Objectives

Results

Conclusion