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Real Convergence and Euro Adoption in Central and Eastern Europe: Trade and Business Cycle Correlations as Endogenous Criteria for Joining EMU

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  • Frankel, Jeffrey

    (Harvard U)

Abstract

Optimum currency area theory says that trade patterns and cyclical correlations are important criteria for whether a country should join a monetary area such as EMU. But these criteria are endogenous. Recent econometric estimates suggest that currency unions have far greater effects on trade patterns than previously believed. Since currency unions are good for trade, and trade is good for growth, that is one major argument in favor of adopting the euro. There are the usual countervailing arguments for retaining monetary independence, particularly the famous asymmetric shocks. But the pattern of shocks is also endogenous. For the countries of Central and Eastern Europe joining the EU in 2004, one risk-averse argument for joining later, but not necessarily yet, is that trade with euroland can be expected to continue increasing. Econometric estimates suggest that the growing trade links will in turn lead to growing cyclical correlation, that is, to cyclical convergence. The implication is that the new EU members may better qualify for the optimum currency area criteria in the future, even in just five years, than they do as of today. Another kind of convergence, income convergence, is also relevant, but will take too long to wait for.

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Bibliographic Info

Paper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp04-039.

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Date of creation: Aug 2004
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Handle: RePEc:ecl:harjfk:rwp04-039

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Cited by:
  1. Michael J. Artis & Jarko Fidrmuc & Johann Scharler, 2008. "The transmission of business cycles," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 16(3), pages 559-582, 07.
  2. Viviana Fern�ndez & Ali M. Kutan, 2005. "Do Regional Integration Agreements Increase Business-Cycle Convergence? Evidence from Apec and Nafta," Documentos de Trabajo 202, Centro de Economía Aplicada, Universidad de Chile.
  3. Inklaar, Robert & Jong-A-Pin, Richard & de Haan, Jakob, 2008. "Trade and business cycle synchronization in OECD countries--A re-examination," European Economic Review, Elsevier, vol. 52(4), pages 646-666, May.
  4. Zsolt Darvas & György Szapáry, 2006. "Business Cycle Synchronization in the Enlarged EU," Working Papers 0604, Department of Mathematical Economics and Economic Analysis, Corvinus University of Budapest.
  5. Cohen, Joseph N., 2008. "Managing the Faustian bargain: monetary autonomy in the pursuit of development in Eastern Europe and Latin America," MPRA Paper 22435, University Library of Munich, Germany.
  6. Qin, Duo & Tan, Tao, 2009. "How much intraregional exchange rate variability could a currency union remove? The case of ASEAN+3," Journal of Banking & Finance, Elsevier, vol. 33(10), pages 1793-1803, October.
  7. Baldwin, Richard E., 2006. "The euro’s trade effects," Working Paper Series 0594, European Central Bank.

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