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The Endogeneity of the Optimum Currency Area Criteria, Intraindustry Trade, and EMU Enlargement

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  • Jarko Fidrmuc

Abstract

This paper tests the endogeneity hypothesis of OCA criteria (Frankel and Rose, 1998) in a cross-section of OECD countries between 1990 and 1999. It is shown that intraindustry trade actually causes the convergence of business cycles, while there is no direct relation between business cycles and bilateral trade intensity. As far as intraindustry trade is positively correlated with trade, the OCA endogeneity hypothesis is confirmed, although the argumentation follows Krugman (1993). Finally, the endogeneity of OCA criteria implies a comparable degree of business cycle harmonization of CEECs with EU countries as for the current members for the medium term.

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File URL: http://www.econ.kuleuven.be/licos/publications/dp/dp106.pdf
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Bibliographic Info

Paper provided by LICOS - Centre for Institutions and Economic Performance, KU Leuven in its series LICOS Discussion Papers with number 10601.

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Length: 22 pages
Date of creation: 2001
Date of revision:
Handle: RePEc:lic:licosd:10601

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Keywords: Optimum currency area; EMU; trade; business cycle; CEECs;

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  1. Fidrmuc, Jan & Horvath, Julius & Fidrmuc, Jarko, 1999. "Stability of Monetary Unions: Lessons from the Break-up of Czechoslovakia," Transition Economics Series 10, Institute for Advanced Studies.
  2. Hummels, David & Levinsohn, James, 1995. "Monopolistic Competition and International Trade: Reconsidering the Evidence," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 799-836, August.
  3. Boone, Laurence & Maurel, Mathilde, 1999. "An Optimal Currency Area Perspective of the EU Enlargement to the CEECs," CEPR Discussion Papers 2119, C.E.P.R. Discussion Papers.
  4. Eduard HOCHREITER & Georg WINCKLER, 1993. "The Advantages of Tying Austria's Hands: The Success of the Hard Currency Strategy," Vienna Economics Papers vie9307, University of Vienna, Department of Economics.
  5. Boone, Laurence & Maurel, Mathilde, 1998. "Economic Convergence of the CEECs with the EU," CEPR Discussion Papers 2018, C.E.P.R. Discussion Papers.
  6. Willem H. Buiter & Clemens Grafe, 2001. "Central Banking and the Choice of Currency Regime in Accession Countries," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  7. Cincibuch, Martin & Vávra, David, 2000. "Towards the EMU: A Need For Exchange Rate Flexibility?," Transition Economics Series 17, Institute for Advanced Studies.
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