The Introduction of the Euro in Central and Eastern European Countries - Is it Economically Justifiable?
This paper aims to analyse the correlation of demand and supply shocks between the EMU and CEECs in order to examine whether there is some degree of business cycle coordination between them. The main objective is to investigate the impact on Croatia and compare it with other CEECs. Croatia is of interest in this paper since there is a lack of empirical studies on this topic which include Croatia in the sample. Information on the correlation of demand and supply shocks between the EMU and CEECs is important if a country wants to introduce the euro since the synchronisation of business cycles and policy coordination will have a significant impact on willingness to enter the monetary union (except if the decision is a political one). Since Croatia has started its path towards the EU, it should be expected that it will introduce the euro, since there is no opt-out clause for new members. In order to gather results, supply and demand shocks are extracted from data using Blanchard and Quah (1989) methodoogy and then the correlations of shocks between the EMU and CEECs are calculated as well as the size of shocks and the speed of adjustments. Results indicate that Croatia is, at the moment, far from being ready for the common monetary policy with the EMU; while other CEE countries such as Slovenia and Latvia, which in fact first applied for the introduction of euro, have the closest correlation of their business cycles with those of the EMU.
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