Growth and Regional Development in an Enlarged European Union
Edited by Gertrude Tumpel-Gugerell and Peter Mooslechner
Chapter 11: Optimal currency area between the EU and accession countries: the status quo
11. Optimal currency area between the EU and accession countries: the status quo Jarko Fidrmuc and Iikka Korhonen 11.1. INTRODUCTION1 In this chapter, we examine the correlation of supply and demand shocks between the Central and Eastern European countries (CEECs) and the euro area. Our purpose is to assess whether the accession countries belong to the same optimum currency area as the current members of the monetary union. At the same time, we use data from the 1990s to assess the similarity of the shocks within the euro area. This is the ﬁrst attempt to assess the similarity of shocks vis-à-vis the euro area, as previous studies have almost uniformly concentrated on correlation with German (the ‘core’ country) shocks. In practice the supply and demand shocks are recovered from two-variable (output and inﬂation) vector autoregressive (VAR) models with the help of the decomposition developed by Blanchard and Quah (1989). The diﬀerent shocks are identiﬁed from the VAR residuals with the help of the restriction that demand shocks cannot have a permanent eﬀect on output. The same procedure has been used before to assess whether the current European monetary union constitutes an optimum currency area, for example by Bayoumi and Eichengreen (1993). Our contribution also updates their results (although with quarterly data), and we ﬁnd that in general shocks in the member countries of the euro area are quite highly correlated. Moreover, countries like Italy, which were deemed ‘peripheral’, have become more integrated with the other...
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