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How Synchronized are Central and East European Economies with the Euro Area? Evidence from a Structural Factor model

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  • Sandra Eickmeier
  • Joerg Breitung

Abstract

A high degree of cyclical synchronization between central and east European countries (CEECs) and the euro area is generally seen as a prerequisite for successful EMU enlargement. This paper investigates comovements between CEECs and the euro area. We first establish stylized facts on economic linkages using dynamic correlation and cohesion measures. By means of a large-scale dynamic factor model, we then identify the main structural common euro-area shocks and investigate their transmission to the CEECs in comparison to the current EMU members. We finally carry out a counterfactual experiment which allows us to assess the costs and benefits of accession to EMU for individual CEECs in terms of economic volatilities and the implications of enlargement for synchronization. Overall, our results are mixed. Dynamic business cycle and inflation correlations between CEECs and the euro area are, on average, lower than between individual EMU members and the euro area, but they are higher than for some small peripheral EMU countries. This is confirmed by our other measure, variance shares of output and inflation explained by common euro-area factors. The proliferation of euro-area shocks to the CEECs does not differ significantly from the propagation to EMU countries in most cases. Based on our counterfactual experiment, we do not find significant stabilizing or destabilizing effects through a common monetary policy and fixed exchange rates. We also find that business cycle synchronization between CEECs and between most CEECs and the euro area will increase. There seems to be considerable heterogeneity across CEECs, implying that for some countries, accession to EMU would be more costly than for others. According to our analysis and based on our measures, Poland, Slovenia, Hungary and Estonia are more suitable EMU candidates than other countries. --

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Bibliographic Info

Paper provided by Thurgauer Wirtschaftsinstitut, Universität Konstanz in its series TWI Research Paper Series with number 14.

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Date of creation: 2005
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Handle: RePEc:twi:respas:0014

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Keywords: Dynamic factor models; international business cycles; EMU enlargement; counterfactual experiment;

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References

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Cited by:
  1. Jarko Fidrmuc & Iikka Korhonen, 2006. "Meta-Analysis of the Business Cycle Correlation between the Euro Area and the CEECs," CESifo Working Paper Series 1693, CESifo Group Munich.
  2. Christos S. Savva & Kyriakos C. Neanidis & Denise R. Osborn, 2007. "Business Cycle Synchronization of the Euro Area with the New and Negotiating Member Countries," Centre for Growth and Business Cycle Research Discussion Paper Series 91, Economics, The Univeristy of Manchester.
  3. Breitung, Jörg & Eickmeier, Sandra, 2005. "Dynamic factor models," Discussion Paper Series 1: Economic Studies 2005,38, Deutsche Bundesbank, Research Centre.
  4. David Matesanz Gomez & Guillermo J Ortega & Benno Torgler, 2012. "Synchronization and Diversity in Business Cycles: A Network Approach Applied to the European Union," School of Economics and Finance Discussion Papers and Working Papers Series 277, School of Economics and Finance, Queensland University of Technology.
  5. Christian Schulz, 2008. "Forecasting economic activity for Estonia : The application of dynamic principal component analyses," Bank of Estonia Working Papers 2008-02, Bank of Estonia, revised 30 Oct 2008.
  6. Christa Randzio-Plath & Carsten Hefeker & Jarko Fidrmuc & Gunther Schnabl & Hermann Remsperger, 2006. "Erweiterung der Eurozone: Welche Auswirkungen hat dies auf die europäische Wirtschaft?," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 59(22), pages 03-18, November.
  7. Ivan Todorov, 2012. "European Economic Integration Theories and Criteria," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 2, pages 131-152.
  8. Bartosz Maćkowiak, 2006. "How Much of the Macroeconomic Variation in Eastern Europe is Attributable to External Shocks?," Comparative Economic Studies, Palgrave Macmillan, vol. 48(3), pages 523-544, September.
  9. Zuzana Brixiova & Margaret H. Morgan & Andreas Wörgötter, 2010. "On The Road to Euro: How Synchronized Is Estonia with the Euro zone?," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 7(1), pages 203-227, June.
  10. Christian Schulz, 2007. "Forecasting economic growth for Estonia : application of common factor methodologies," Bank of Estonia Working Papers 2007-09, Bank of Estonia, revised 04 Sep 2007.

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