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EU Enlargement and Endogeneity of some OCA Criteria: Evidence from the CEECs

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  • Ian Babetskii

Abstract

There are two opposite points of view on the link between economic integration and business cycle synchronization. De Grauwe (1997) classifies these competing views as 'The European Commission View' and 'The Krugman View'. According to the European Commission (1990), closer integration leads to less frequent asymmetric shocks and to more synchronized business cycles between countries. On the other hand, for Krugman (1993) closer integration implies higher specialization and, thus, higher risks of idiosyncratic shocks. Drawing on the evidence from a group of transition countries which have experienced a notable increase in trade openness and economic integration with the European Union during the past decade, this paper tries to determine whose argument is supported by the data. This is done by confronting estimated time-varying coefficients of supply and demand shock asymmetry with indicators of trade intensity and exchange rates. We find that (i) an increase in trade intensity leads to higher symmetry of demand shocks; the effect of integration on supply shock asymmetry varies from country to country; (ii) a decrease in exchange rate volatility has a positive effect on demand shock convergence. The results for demand shocks can be interpreted in favor of 'The European Commission View', also known as the endogeneity argument by Frankel and Rose (1998) in the OCA criteria discussion, according to which trade links reduce asymmetries between countries. Overall, our results support Kenen's (2001) argument that the impact of trade integration on shock asymmetry depends on the type of shock.

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Bibliographic Info

Paper provided by Czech National Bank, Research Department in its series Working Papers with number 2004/02.

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Date of creation: Mar 2004
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Handle: RePEc:cnb:wpaper:2004/02

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Keywords: EU enlargement; business cycle; trade; OCA (optimal currency area);

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Cited by:
  1. Michal Bencik, 2011. "Business cycle synchronisation between the V4 countries and the euro area," Working and Discussion Papers WP 1/2011, Research Department, National Bank of Slovakia.
  2. Vit Barta, 2005. "Fulfilment of the Maastricht Inflation Criterion by the Czech Republic: Potential Costs and Policy Options," Research and Policy Notes 2005/04, Czech National Bank, Research Department.
  3. Fidrmuc, Jarko & Korhonen, Iikka, 2004. "A meta-analysis of business cycle correlation between the euro area and CEECs: What do we know – and who cares?," BOFIT Discussion Papers 20/2004, Bank of Finland, Institute for Economies in Transition.
  4. Fidrmuc, Jarko & Korhonen, Iikka, 2006. "Meta-analysis of the business cycle correlation between the euro area and the CEECs," Journal of Comparative Economics, Elsevier, vol. 34(3), pages 518-537, September.
  5. João Silvestre & António Mendonça, 2007. "The Endogeneity of Optimum Currency Areas Criteria: Some Evidence from the European Union and Portugal," International Advances in Economic Research, Springer, vol. 13(1), pages 1-18, February.
  6. Bojeşteanu, Elena & Manu, Ana Simona, 2011. "Analiza empirică a sincronizării ciclului de afaceri şi a similarităţii şocurilor între România şi zona euro
    [Empirical analysis of business cycle synchronization and shock similarity betw
    ," MPRA Paper 31295, University Library of Munich, Germany.
  7. Jan Babecky & Oxana Babetskaia-Kukharchuk & Kamil Galuscak & Dana Hajkova & Jaroslav Hermanek & Tomas Holub & Roman Horvath & Petr Jakubik & Lubos Komarek & Zlatuse Komarkova & Petr Kral & Filip Novot, 2008. "Analyses of the Czech Republic's Current Economic Alignment with the Euro Area 2008," Occasional Publications - Edited Volumes, Czech National Bank, Research Department, number as08 edited by Dana Hajkova, August.

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