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Comparing the Convergence of Czech Economy with Selected Euro Zone Members Using Impulse-Response Functions and Supply and Demand Shocks

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  • Roman Hušek
  • Tomáš Formánek
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    Abstract

    Our paper focuses on the analysis of supply and demand shocks and on the estimation of expected costs of introducing Euro currency into Czech Republic (CR). The analysis is based on the theory of optimal currency areas by Mundell (1961, 1973) and uses a macroeconomic approach formalized by Bayoumi (1994). VAR models and the Blanchard-Quah decomposition (Blanchard and Quah, 1989) are used in order to simulate aggregated macroeconomic impulse response dynamics and to isolate supply and demand shocks for further inspection. Based on the analysis performed we conclude that given current circumstances and persistent differences in symmetry of economic shocks in CR and selected Euro zone countries, the costs from introducing the Euro to CR (as measured by fluctuations of real macroeconomic variables) would be nonzero, however presumably not significantly different from equivalent costs experienced in Austria or Slovakia (i.e. not prohibitive or signifi cantly damaging).

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    Bibliographic Info

    Article provided by University of Economics, Prague in its journal Politická ekonomie.

    Volume (Year): 2011 (2011)
    Issue (Month): 3 ()
    Pages: 291-309

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    Handle: RePEc:prg:jnlpol:v:2011:y:2011:i:3:id:792:p:291-309

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    Related research

    Keywords: VAR model; supply and demand shocks; optimum currency area; macroeconomic convergence; impulse-response analysis; Blanchard-Quah decomposition;

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    References

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    1. Tamim Bayoumi, 1994. "A Formal Model of Optimum Currency Areas," IMF Working Papers 94/42, International Monetary Fund.
    2. Magdalena Morgese Borys & Roman Horvath, 2008. "The Effects of Monetary Policy in the Czech Republic: An Empirical Study," International Trade and Finance Association Conference Papers 1109, International Trade and Finance Association.
    3. Geweke, John & Meese, Richard & Dent, Warren, 1983. "Comparing alternative tests of causality in temporal systems : Analytic results and experimental evidence," Journal of Econometrics, Elsevier, vol. 21(2), pages 161-194, February.
    4. Maria Demertzis & Andrew Hallett & Ole Rummel, 2000. "Is the European union a natural currency area, or is it held together by policy makers?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 136(4), pages 657-679, December.
    5. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbance," Working papers 497, Massachusetts Institute of Technology (MIT), Department of Economics.
    6. Zsolt Darvas, 2006. "Monetary Transmission in the New EU Member States: Evidence from Time-Varying Coefficient Vector Autoregression," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1.
    7. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
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