Measuring the effects of oil price and Euro-area shocks on CEECs business cycles

Antonella Cavallo,Antonio Ribba

doi:10.1016/j.jpolmod.2017.09.006

Antonella Cavallo, Antonio Ribba

Open Access

https://doi.org/10.1016/j.jpolmod.2017.09.006

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Abstract

Assessing the cyclical alignment of national business cycles with the Euro-area one is of great importance in order to guide policy decisions concerning the enlargement of the Euro area. To this end, in this paper we aim to measure the effects of external macroeconomic shocks on business cycles of Central and Eastern European Countries, not yet Euro-area members. Using quarterly data from 1999 to 2015 and the structural near-VAR methodology, we focus on the effects of Euro-area monetary policy and global oil price shocks on prices and output of the analyzed countries. Results show that business cycle fluctuations are mainly explained by domestic shocks in the short run, while monetary policy and oil price shocks play an increasing role in the medium run. Adding domestic fiscal shocks, the overall picture does not change significantly, since fiscal policy turns out to be a minor driver of business cycle fluctuations in CEECs. In the whole, our findings do not support an Euro-area enlargement at short horizons.

Highlights

In recent years, the Euro Area enlargement has been one of the most debated issues among scholars and within European institutions
This paper investigates the effects of macroeconomic shocks, at the Euro-area and international level, on prices and output of some Central and Eastern European Countries that have already joined the European Union but not the Euro Area
In regard to external shocks, we focus on monetary policy and oil price shocks by virtue of the important role played by the common monetary policy in the Euro Area and given the large turmoil in the oil market experienced in recent years

Summary

Introduction

The Euro Area enlargement has been one of the most debated issues among scholars and within European institutions. All the Central and Eastern European Countries (CEECs), except Albania, have become members of the European Union during the last two decades. Some of these countries have already joined the Euro Area, others have shown a strong interest in entering.. The Convergence Criteria have been designed in order to ensure that new Euro-area members are able to absorb macroeconomic shocks without using domestic monetary policy and exchange rate instruments. This ability will strongly depend on their economic integration and alignment with the Euro-area business cycle.

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