Abstract
The introduction of the euro for Croatian citizens meant the abandonment of the deutsche mark, a reliable currency, which had been used for a long time for comparison purposes and savings. Today, Croatia is a small, opened, indebted and highly euroised country, in which frequently mentioned introduction of euro is seen as a solution that could improve country’s economic position. The question of a common monetary policy is closely related to the issue of business cycle coherence between the members of such an area. Although a cycle in economic activity is a stylized fact, in economics it is less clear as to when the fluctuations in macroeconomic variables coincide between countries/regions and when these dynamics synchronize and/or converge. By analyzing two measures of business cycle coherence, namely synchronicity and similarity, between Croatia and new EMU members, we want to reconcile with vast empirical evidence supporting the hypothesis that monetary integration process results from a greater business cycle convergence and leads to an optimal currency area which finally leads to greater economic welfare in each of the member countries. Estimations are based on deviation cycle approach. Results in general indicate relatively similar cycle dynamics across the observed variables, suggesting that Croatia satisfies this selective criterion for its inclusion into the monetary union. Nonetheless, monetary integration is far more complicated issue, hence it requires further scientific verification and conceptualization.
Highlights
Reversals in business cycles raise a question whether a group of countries can achieve macroeconomic stability and/or economic growth by coordinating its economic policies
Recent economic turmoil reminded the EU that adequate degree of cross-country business cycle coherence is important for monetary unions to be viable in the longrun, as one can argue that the current degree of eurozone economic integration is too low for viable currency union (Ahmed, Chaudhry and Straetmans, 2015)
We were focused on the question whether Croatia is ready for a deeper degree of economic integration within the EU i.e. common monetary policy
Summary
Reversals in business cycles raise a question whether a group of countries can achieve macroeconomic stability and/or economic growth by coordinating its economic policies. Countries with more correlated and synchronized business cycles are more likely to ‘bear the fruit’ of any economic bond, especially of a monetary union for they are less sensitive to asymmetric shocks, the cost associated with the central monetary policy is lower. As Stanišić (2013) put it well, a strong degree of business cycle synchronization across monetary union reduces the cost of giving up an independent exchange rate and monetary policy, especially when alternative adjustment mechanisms are unable to absorb the impact of asymmetrical shocks across countries because of price and wage rigidities and insufficient labor mobility. Recent economic turmoil reminded the EU that adequate degree of cross-country business cycle coherence is important for monetary unions to be viable in the longrun, as one can argue that the current degree of eurozone economic integration is too low for viable currency union (Ahmed, Chaudhry and Straetmans, 2015)
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