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After Two Decades of Integration: How Interdependent are Eastern European Economies and the Euro Area?

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  • Prettner, Catherine
  • Prettner, Klaus

Abstract

This article investigates the interrelations between the initial members of the Euro area and five important Central and Eastern European economies. We set up a theoretical open economy model to derive the Purchasing Power Parity, the Interest Rate Parity, the Fisher Inflation Parity, and an output gap relation. After taking convergence into account, they are used as restrictions on the cointegration space of a structural vector error correction model. We then employ generalized impulse response analysis to assess the dynamic effects of shocks in output and interest rates on the respective other area as well as the implications of shocks in the exchange rate and in relative prices on both areas. The results show a high degree of interconnectedness between the two economies. There are strong positive spillovers in output to the respective other region with the magnitude of the impact being similarly strong in both areas. Furthermore, we find a multiplier effect being present in Eastern Europe and some evidence for the European Central Banks' desire towards price stability.

Suggested Citation

  • Prettner, Catherine & Prettner, Klaus, 2012. "After Two Decades of Integration: How Interdependent are Eastern European Economies and the Euro Area?," Department of Economics Working Paper Series 138, WU Vienna University of Economics and Business.
    • Handle: RePEc:wiw:wus005:3493
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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. [経済]オリメンと新規加入メンバーの関係
      by himaginary in himaginaryの日記 on 2012-05-31 12:00:00
    2. How integrated are Eastern and Western Europe now?
      by Economic Logician in Economic Logic on 2012-05-24 19:10:00

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    More about this item

    Keywords

    European Economic Integration; structural vector error correction model; generalized impulse response analysis; Europäische Integration; Osteuropa; wirtschaftliche Stabilität; Schock ; Auswirkung;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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