شباهت شوک های عرضه و تقاضا بین منطقه یورو و CEEC ها

We assess the correlation of supply and demand shocks between the countries of the euro area and the accession countries in the 1990s. Shocks are recovered from estimated structural vector autoregressive (SVAR) models of output growth and inflation. We find that some accession countries have a quite high correlation of the underlying shocks with the euro area. However, even for many advanced accession countries, the shocks remain significantly more idiosyncratic. Continuing integration within the European Union (EU) is likely to align the business cycles of these countries similarly to the synchronization of supply and demand shocks we document for the EU in the 1990s.

In this study, we examine the correlation of supply and demand shocks between the Central and Eastern European countries (CEECs) and the euro area. Our purpose is to assess whether the European Union (EU) accession countries belong to the same optimum currency area as the current members of the monetary union. At the same time, we use data from the past decade to assess the similarity of the shocks within the euro area. However, the optimum currency area theory does not provide clear critical values ensuring that the gains are higher than the costs from the participation in a currency union. Therefore, it is necessary to compare each country with some reference set of countries. It is obvious to compare potential members of a currency union with earlier currency unions (e.g. USA) or more recently with the member states of the Economic and Monetary Union (EMU). We follow the latter approach in our paper. Moreover, we compare the correlation of supply and demand shocks in the perspective new members of the EU/EMU also with the non-European OECD countries. We show that the inclusion of a broader set of reference countries is important for the interpretation of the results. In practice, the supply and demand shocks are recovered from two-variable (output and inflation) vector autoregressive (VAR) models with the help of the decomposition developed by Blanchard and Quah (1989). The different shocks are identified from the VAR residuals with the help of the restriction that demand shocks cannot have a permanent effect on output. The same procedure has been used before to assess whether the current European monetary union constitutes an optimum currency area, e.g. by Bayoumi and Eichengreen (1993). Even though the membership of the CEECs in the monetary union is several years away even with the most optimistic assumptions, it is of interest to see how closely they correspond to the criteria of an optimum currency area. In all previous studies, correlation of shocks has been calculated against Germany or perhaps France, which are thought to form the “core” of the euro area. However, the German experience in the 1990s may have been unique because of unification. Therefore, we argue that a correlation with the euro area as a whole is the appropriate benchmark. Moreover, as a common monetary policy is conducted for the whole euro area, it is appropriate to assess how well the CEECs are integrated with the entire euro area, not with single countries within this aggregate. A priori, one could expect a quite high correlation in business cycles, as the CEECs’ foreign trade is conducted largely with the EU countries (see Fidrmuc, 2003). It turns out that shocks in some accession countries are indeed quite highly correlated with the euro area shocks. Especially, Hungary and Estonia are very close to smaller euro area countries in this regard. Generally, demand shocks are quite different in the CEECs, perhaps reflecting their different policy priorities during the transition towards market economies in the 1990s. Our results indicate that there are accession countries for which prospective membership in the monetary union would probably not pose too many problems, at least not because of asymmetric business cycles. For other CEECs the asymmetry of business cycles continues to be quite high, and hence early membership in the monetary union could be problematic. The paper is organized as follows. The next section reviews literature on an optimum currency area theory, as it relates to the accession countries of Central and Eastern Europe.1 The third section describes the method used to recover supply and demand shocks. In Section 4, we proceed to estimate the shocks and assess their nature across countries. The last section offers some concluding remarks.

In this paper, we have assessed the correlation of supply and demand shocks between the euro area and EU accession countries as compared to selected countries during the 1990s. Supply and demand shocks were recovered from structural vector autoregressive models. First, we find that the correlation of supply shocks differs considerably from country to country. Also, correlation of demand shocks in the accession countries with euro area is usually lower than correlation of supply shocks. Second, some countries are at least as well correlated with the euro area shocks as are many current members of EMU. The two countries with the highest correlation of supply shocks are Hungary and Estonia, although the estimated structural VAR for the latter country shows worse statistical performance. Not coincidentally, these two countries have also received most foreign direct investment on a per capita basis and they have very extensive trade relations with the countries of the euro area (and the EU in general). Hungary also has a high correlation of demand shocks. For many other accession countries, the degree of correlation is clearly lower. This holds true even for many advanced transition countries, e.g. the Czech Republic and Slovenia. In Latvia and Lithuania, the demand shocks are negatively correlated, even though for Latvia the correlation of supply shocks is positive. Third, the size of shocks is relatively low for all accession countries with the exception of Poland and Slovenia. The size of shocks in the Czech Republic and in Estonia is even clearly lower than in the core EMU countries. This finding also supports an easy adoption of euro in these countries. Finally, the adjustment of output to supply and demand shocks is very similar to those in the euro area in Hungary and Poland. The Czech Republic displays a similar behavior pattern in response to demand shocks, but different behavior for supply shocks Thus, our findings seem to at least partially confirm the results of, e.g. Frenkel et al. (1999), Boone and Maurel (1999), Fidrmuc (2003), Frenkel and Nickel (2002), and Korhonen (2003). In all these studies, the Hungarian economic cycle is quite well correlated with the European cycle. The same applies to Slovenia and perhaps also to Estonia. The latter two are very small economies which are geographically close to the EU, and it is therefore not surprising that their economic cycles are correlated with that of the EU (or the euro area). For the other accession countries, the correlation was perhaps not very high during the 1990s, but the situation may have changed over time. Some policy conclusions emerge from our study. First, for some accession countries (e.g. Hungary and Estonia) joining the euro area fairly quickly would not imply large welfare losses because of asymmetric business cycles. Correlation of their supply and demand shocks with the euro area does not differ much from the smaller euro area countries’ correlation. A reasonable short time within the ERM II could also be expected for these countries. On the other hand, for many countries (e.g. Lithuania and Slovakia) correlation of shocks remains very low. Therefore a soon membership in the monetary union could prove to be detrimental for them. The same argument could also apply to a membership in the ERM II, although this arrangement does offer wide fluctuation bands around the central parity and a chance to change the central parity if needed. At the same time, one can argue that membership in the monetary union by itself will foster further integration and higher correlation of business cycles.