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On The Road to Euro: How Synchronized Is Estonia with the Euro zone?

Author

Listed:
  • Zuzana Brixiova
  • Margaret H. Morgan
  • Andreas Wörgötter

Abstract

While the currency board served Estonia well during transition in the 1990s, it has limited its ability to counter the impact of the global financial crisis and heightened the currency risks. The euro adoption has thus become a top policy priority again. However, this paper finds that even after almost two decades of hard peg with the core of the euro zone shocks affecting Estonia are relatively weakly synchronized with those of the zone, contributing to large output volatility. Nevertheless, the case for euro adoption by Estonia holds, since the costs of the loss of independent monetary policy were paid, and – as the global financial crisis demonstrated – the currency board is no substitute for the common currency. To reduce future output volatility, Estonia should move to counter-cyclical fiscal policies, maintain labor and product market flexibility, and adopt policies stimulating rise in the knowledge and high-tech content of its production.

Suggested Citation

  • 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.
  • Handle: RePEc:liu:liucej:v:7:y:2010:i:1:p:203-227
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Dorota Zuchowska, 2015. "Accession To The Eurozone As Lithuania’S Exit Strategy From The Currency Board System," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 10(3), pages 27-43, September.
    2. Mary-Françoise RENARD & Hang XIONG, 2012. "Strategic Interactions in Environmental Regulation Enforcement: Evidence fromChinese Provinces," Working Papers 201207, CERDI.
    3. Wörgötter, Andreas & Brixiova, Zuzana, 2020. "Monetary Unions of Small Currencies and a Dominating Member: What Policies Work Best for Benefiting from the CMA?," IZA Policy Papers 163, Institute of Labor Economics (IZA).
    4. Zuzana Brixiova & Qingwei Meng & Mthuli Ncube, 2015. "Can Intra-Regional Trade Act as a Global Shock Absorber in Africa?," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 16(3), pages 141-162, July.
    5. Dorota Zbierzchowska, 2010. "Estonian Road To Euro Area – A Struggle With Inflation Within The Currency Board System," Oeconomia Copernicana, Institute of Economic Research, vol. 1(1), pages 25-42, December.
    6. Mthuli Ncube & Zuzana Brixiova & Meng Qingwei, 2014. "Working Paper 198 - Can Intra-Regional Trade Act as a Global Shock Absorber in Africa?," Working Paper Series 2104, African Development Bank.
    7. Albert Mafusire & Zuzana Brixiova, 2013. "Macroeconomic Shock Synchronization in the East African Community," Global Economy Journal (GEJ), World Scientific Publishing Co. Pte. Ltd., vol. 13(2), pages 261-280, June.
    8. Mary-Françoise Renard & Hang Xiong, 2012. "Strategic Interactions in Environmental Regulation Enforcement: Evidence from Chinese Provinces," Working Papers halshs-00672449, HAL.
    9. Dorota Zuchowska, 2015. "Accession to the Eurozone as Lithuania’s exit strategy from the currency board system," Working Papers 10/2015, Institute of Economic Research, revised Feb 2015.
    10. Arslan Razmi, 2018. "Montenegro’s Unilateral Euroization," UMASS Amherst Economics Working Papers 2018-13, University of Massachusetts Amherst, Department of Economics.
    11. Loewald, Christopher & Wörgötter, Andreas, 2019. "Do monetary unions dream of structural reforms?," ECON WPS - Vienna University of Technology Working Papers in Economic Theory and Policy 01/2019, Vienna University of Technology, Institute for Mathematical Methods in Economics, Research Group Economics (ECON).

    More about this item

    Keywords

    shock synchronization; structural VAR; euro adoption; financial crisis; Estonia;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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