Analysis of shocks affecting Europe: EMU and some central and eastern acceding countries

Abstract

This paper deals with the synchronization of business cycles and economic shocks between the euro area and acceding countries. We therefore extract the business cycle component of output by using Hodrick-Prescott filter. Supply and demand shocks are recovered from estimated structural VAR models of output growth and inflation using long run restriction (Blanchard and Quah). We then check the (A) symmetry of these shocks by calculating the correlation between euro area shocks and those of the different acceding countries. We find that several acceding countries have a quite high correlation of demand shocks with the euro area however supply shocks are asymmetric; the correlation between euro area and central and east European countries (CEECs) is negative. We therefore conclude that joining the European Monetary Union is not yet possible: central and east European countries have to make structural changes to join the European Monetary Union.