Economic Convergence and Divergence in Europe
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Economic Convergence and Divergence in Europe

Growth and Regional Development in an Enlarged European Union

Edited by Gertrude Tumpel-Gugerell and Peter Mooslechner

This highly topical book addresses the challenge of economic convergence within Europe, beginning with a thorough review of the theory of growth and related empirical research. Historical and more recent economic developments within the present EU and current accession countries are discussed, along with the design for the process of further integration of accession countries into the EU and the Euro area. Moreover, the potential to achieve a sustainable catch-up process in Western Balkan countries, the Ukraine and Russia is explored, focusing on the task facing the EU in designing proper policies vis-à-vis these countries. The contributors’ varied perspectives ensure that the theories and policies postulated are linked closely with the actual situation in accession countries and offer up-to-date insights.
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Chapter 11: Optimal currency area between the EU and accession countries: the status quo

Jarko Fidrmuc and Iikka Korhonen


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 euro area countries in the 1990s. The second set of results relates to...

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