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

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Author Info
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 CESifo Working Paper No. 2359.

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

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

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
E00 - Macroeconomics and Monetary Economics - - General - - - General
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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