Demand and supply shocks synchronisation. Evidence from Romania in the context of European Integration
The current paper looks at the degree of demand and supply shocks synchronization between Euro Area and Romania together with three other EMU candidate countries to assess the implications for the economy of joining the single currency area. Shock identification was done using a Structural VAR analysis. I find that Romania has positive correlation of supply shocks with EA and its member countries and zero correlation of demand shocks which is likely to have been triggered by different economic policies Romania followed in the last years. At the same time, the paper supports the view that in light of the optimal currency area, allowing Romania and the other analyzed countries to join EMU would not add to much noise. It is rather a question for the individual aspiring countries to ensure that they have the mechanisms in place to implement adequate fiscal policies and synchronization in their business cycles, lest they find themselves without appropriate demand management.
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