Aggregate demand disturbances in the visegrad group and the Eurozone

Abstract

Objective: The main goal of the paper is to evaluate, in a comparative manner, the degree of similarities in aggregated demand disturbances in the Visegrad Group (the Czech Republic, Hungary, Poland and Slovakia, collectively: V4) and the Eurozone economies from 1995 to 2013. Research Design & Methods: The underlying demand disturbances are extracted using the structural vector auto-regression (SVAR) model with the long-run restrictions. The identification scheme is based on the theoretical aggregate supply- aggregate demand (AS-AD) model. The obtained approximations of unobservable demand shocks are then used to infer on their correlation structures. Findings: The demand shocks among the four economies are described by the highest correlation among all chosen sub-samples. The dynamic approach revealed that the synchronization of the demand shocks in the V4 Group was stronger even when compared to the EMU core. The adjustments to the demand shocks in the V4 countries are relatively flexible and these economies converge to long-run equilibria at a fast pace. Implications & Recommendations: The V4 countries fulfil substantial criteria of an optimum currency area and could benefit from adoption of a single currency, as well as a common monetary policy. Contribution & Value Added: This comparative empirical study brings evidence on the similarities in aggregate demand shocks within the V4 and EMU countries.