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Are the Baltic Countries Ready to Adopt the Euro? A Generalised Purchasing Power Parity Approach

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  • Guglielmo Maria Caporale
  • Davide Ciferri
  • Alessandro Girardi

Abstract

This paper focuses on macroeconomic interdependencies between the Euro area and three transition economies (Estonia, Lithuania and Latvia), with the aim of establishing whether the latter are ready to adopt the Euro. The theoretical framework is based on the Generalised Purchasing Power Parity (GPPP) hypothesis, which is empirically tested within a Vector Error Correction (VEC) model. Using both monthly and quarterly data over the period 1993-2005, it is found that GPPP holds for the real exchange rate vis-à-vis the Euro of each Baltic country, reflecting a degree of real convergence consistent with Optimum Currency Area criteria. Further, the adopted joint modelling approach for the real exchange rates of the Baltic region outperforms a number of alternative models in terms of out-of-sample forecasts.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2359.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2359

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Keywords: transition economies; Euro area; (Generalised) Purchasing Power Parity; Vector Error Corrector models;

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Cited by:
  1. Viktors Ajevskis & Ramune Rimgailaite & Uldis Rutkaste & Olegs Tkacevs, 2012. "The Assesment of Equilibrium Real Echange Rate of Latvia," Working Papers 2012/04, Latvijas Banka.
  2. Hsing, Yu, 2009. "Responses of Output to Declining Stock Values and Real Depreciation in Lituania," Economia Internazionale / International Economics, Camera di Commercio di Genova, vol. 62(4), pages 429-437.
  3. John Beirne, 2009. "Vulnerability of inflation in the new EU Member States to country-specific and global factors," Economics Bulletin, AccessEcon, vol. 29(2), pages 1420-1431.

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