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On The Road to Euro: How Synchronized Is Estonia with the Euro zone?

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Author Info

  • Zuzana Brixiova
  • Margaret H. Morgan
  • Andreas Wörgötter

Abstract

While the currency board served Estonia well during transition in the 1990s, it has limited its ability to counter the impact of the global financial crisis and heightened the currency risks. The euro adoption has thus become a top policy priority again. However, this paper finds that even after almost two decades of hard peg with the core of the euro zone shocks affecting Estonia are relatively weakly synchronized with those of the zone, contributing to large output volatility. Nevertheless, the case for euro adoption by Estonia holds, since the costs of the loss of independent monetary policy were paid, and – as the global financial crisis demonstrated – the currency board is no substitute for the common currency. To reduce future output volatility, Estonia should move to counter-cyclical fiscal policies, maintain labor and product market flexibility, and adopt policies stimulating rise in the knowledge and high-tech content of its production.

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Bibliographic Info

Article provided by Cattaneo University (LIUC) in its journal The European Journal of Comparative Economics.

Volume (Year): 7 (2010)
Issue (Month): 1 (June)
Pages: 203-227

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Handle: RePEc:liu:liucej:v:7:y:2010:i:1:p:203-227

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Related research

Keywords: shock synchronization; structural VAR; euro adoption; financial crisis; Estonia;

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References

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Cited by:
  1. Albert Mafusire & Zuzana Brixiova, 2012. "Macroeconomic Shock Synchronization in the East African Community," William Davidson Institute Working Papers Series wp1031, William Davidson Institute at the University of Michigan.

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