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Are the New Member States Converging on the Euro Area?: A Business Cycle Analysis for Economies in Transition

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  • Andrew Hughes Hallett
  • Christian R. Richter

Abstract

The Optimal Currency Area theory stresses the importance of co-movement of the business cycles of member states in order for the common currency to be successful. Yet, the identification of (European) business cycles has been inconclusive and is complicated by the enlargement to the new member states in 2004 and their transition to market economies. In this paper, we show how to decompose a business cycle into a time-frequency framework in a way that allows us to compare the growth rate spectra and coherences for the Hungarian, Polish, Czech, German and French economies. We find that, since joining the EU, there has been convergence on the euro area economy at short cycle lengths, but little convergence in long cycles. We argue that this shows evidence of nominal convergence, but little real convergence. The standard Maastricht convergence criteria for membership of the euro therefore need to be adapted to test for real convergence. JEL Classification: C22, C29, C49, F43, O49 Keywords: Time-Frequency Analysis, Coherence, Growth Rates, Business Cycles

Suggested Citation

  • Andrew Hughes Hallett & Christian R. Richter, 2012. "Are the New Member States Converging on the Euro Area?: A Business Cycle Analysis for Economies in Transition," OECD Journal: Journal of Business Cycle Measurement and Analysis, OECD Publishing, Centre for International Research on Economic Tendency Surveys, vol. 2011(2), pages 49-68.
  • Handle: RePEc:oec:stdkab:5kg0nvzlqkf0
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    File URL: https://doi.org/10.1787/jbcma-2011-5kg0nvzlqkf0
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    More about this item

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C29 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Other
    • C49 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Other
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O49 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Other

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