Introduction of the euro in CEE countries – is it economically justifiable? The Croatian case

Abstract

This article analyses correlation of demand and supply shocks between the EMU and the CEECs in order to see whether there is some degree of business cycle coordination between them. The main interest is to investigate the impact on Croatia and compare it with other CEECs. Information on the correlation of demand and supply shocks between the EMU and CEECs is important if a country wants to join the monetary union, since synchronisation of business cycles and policy coordination will have a significant impact on willingness to enter the monetary union (unless the decision is a political one). We employ structural vector autoregression in order to identify demand and supply shocks and analyse their correlation, size and speed of adjustment. The results indicate that at the moment Croatia is far from ready for the common monetary policy of the EMU, while among other CEE countries Slovenia and Latvia have the closest connection between their business cycles and those of the EMU.