Meta-analysis of the business cycle correlation between the euro area and the CEECs
Introduction
Soon after the European Union's Eastern Enlargement in May 2004, several new member states joined the Exchange Rate Mechanism II (ERM II). At present, seven new states participate in the ERM II; the remaining new member countries along with potential EU members Bulgaria and Romania are all expected to join in the coming years.1 Thus, after completing the mandatory two-years in ERM II, Slovenia will introduce the euro in 2007 while the other countries may follow soon after. In this paper, we consider the growing literature on business cycle correlation between the countries of the Central and Eastern Europe (CEECs), namely Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia, and the euro area. Optimum currency area (OCA) theory states that a high degree of business cycle synchronization should be an important criterion for participation in a monetary union. This criterion is applied to issues related to euro adoption and exchange rate regimes in the new member states of the EU as well as to other countries having intensive trade and economic relations with the EU, including prospects for eventual EU membership.
On one hand, the CEECs are relatively small compared to the euro area and are expected to be affected strongly by the business cycle of their most important trading partner, i.e., the euro area. On the other hand, these countries are likely to benefit disproportionately from EU integration and the introduction of the euro, reflecting the relative economic size of the regions. Given these contradictory expectations, authors have applied a range of methodologies and sample periods in measuring recent business cycles. Economic analysis of CEECs is characterized by significant data problems. In general, reliable time series are available only from the beginning of the 1990s; for some countries, data availability is even more limited. Data comparisons from multiple sources often show significant differences and frequent data revisions may make replications of analyses difficult. As a result, the robustness of results reported in any particular study is questionable.
Such data problems are not unfamiliar to researchers in other fields in the natural and social sciences. Meta-analysis of existing studies is a potentially useful way to gain more robust results, as Lipsey and Wilson (2001) discuss. Meta-analyses basically summarize published results on particular topics, provide an aggregate overview of a subject, and allow an analysis of the factors that may influence the results, e.g., data definition, time period, or author characteristics. The use of meta-analysis has become a popular economics research tool, e.g. Stanley (2001) and Stanley and Jarrell (2005), most notably in monetary economics with papers by De Grauwe and Costa Storti (2005), Rose and Stanley (2005), and Knell and Stix (2005). Thus, meta-analysis provides the means to extend analysis beyond standard literature surveys.
The paper is structured as follows. The next section reviews the optimum currency area theory from the perspective of the new member states. Section 3 presents a meta-analysis of 35 publications having more than 450 point estimates of business cycle correlations between the CEECs and the euro area. Section 4 considers the position of the new member states within the EU using meta-regression analysis. Section 5 concludes with a summary and some policy implications.
Section snippets
Literature review
OCA theory originates with Mundell (1961), who proposed that a country would find it advantageous to peg the external value of its currency to another country's currency if the business cycles of the two countries were highly correlated.2
Results of the meta-analysis
We are aware of 35 independent studies4 that provide altogether more than 450 estimations of business cycle correlation between the euro area, or a proxy thereof, and the
Meta-regression analysis
Many studies include at least one of the peripheral euro area economies, e.g. Greece, Ireland or Portugal, in their samples. Hence, we can compare the estimated correlations in the business cycles of CEECs with the same correlations for small current euro area members to gauge the position of the new EU member states. If the business cycle correlation in a new EU member state is higher than in Ireland and Portugal, the new EU country may have progressed far enough in fulfilling this OCA
Conclusion
Our literature survey documents large differences among publications analyzing the fulfillment of the OCA criteria by the CEECs. Nevertheless, meta-analysis confirms that the economic cycles in several CEECs are highly correlated with the euro area cycle. Despite the apparent lack of consensus, a careful examination of the studies indicates that we actually know much about business cycle correlation between the euro area and the new EU members. Many new EU member states, especially Hungary,
Acknowledgements
We are grateful to the Editor and to two anonymous referees for their comments and suggestions. Jukka Pirttilä, Maria Antoinette Silgoner, Anna Czogała, Julius Horvath, Markus Knell, and Eduard Hochreiter also provided valuable comments. The views expressed in this paper are those of the authors and do not necessarily represent the position of the Bank of Finland. The usual disclaimer applies.
References (67)
- Artis, Michael, 2003a. Is there a European business cycle? Working paper No. 1053. CESifo,...
Analysis of European and United Kingdom business cycles and shocks
(2003)- et al.
International business cycles and the ERM: Is there a European business cycle?
International Journal of Finance and Economics
(1997) - Artis, Michael, Marcellino, Massimiliano, Proietti, Tommaso, 2004. Characterising the business cycles for accession...
- Babetskii, Ian, 2004. EU enlargement and endogeneity of some OCA criteria: Evidence from the CEECs. Working paper No....
- Babetskii, Ian, Boone, Laurence, Maurel, Mathilde, 2002. Exchange rate regimes and supply shocks asymmetry: The case of...
- et al.
Exchange rate regimes and shocks asymmetry: The case of the accession countries
Journal of Comparative Economics
(2004) - et al.
Price dynamics in Central and Eastern European EU accession countries
Emerging Markets Finance and Trade
(2003) - Backé, Peter, Thimann, Christian, Arratibel, Olga, Calvo-Gonzalez, Oscar, Mehl, Arnaud, Nerlich, Carolin, 2004. The...
- Barrell, Ray, Holland, Dawn, 2004. Modelling the accession countries: An analysis of symmetric and asymmetric...
Shocking aspects of European monetary integration
Restructuring the ECB
The dynamic effects of aggregate demand and supply disturbances
American Economic Review
EMU and accession countries: Fuzzy cluster analysis of membership
International Journal of Finance and Economics
Podatność Polski na szoki asymetryczne a proces akcesji do Unii Gospodarczej i Walutowej
Bank i Kredyt
Growth in transition: What we know, what we don't, and what we should
Journal of Economic Literature
Exchange rate pass-through in candidate countries
Journal of Banking and Finance
How synchronized are Central and East European economies with the euro area? Evidence from a structural factor model
Journal of Comparative Economics
Equilibrium exchange rates in Central and Eastern Europe: A meta-regression analysis
Journal of Banking and Finance
Cited by (169)
More than just supply and demand: Macroeconomic shock decomposition in Croatia during and after the transition period
2023, Structural Change and Economic DynamicsShadow of the colossus: Euro area spillovers and monetary policy in Central and Eastern Europe
2022, Journal of International Money and FinanceCitation Excerpt :In the absence of synchronized business cycles, the transmission of asymmetric monetary policy shocks within a monetary union becomes more likely, decreasing the effectiveness of stabilization efforts (Altavilla, 2004). While the alignment between business cycles in CEE and the EA has generally increased over time, especially after EU accession and euro adoption, it has also been characterized by heterogeneity across countries (Bencik, 2011; Campos et al., 2019; Fidrmuc and Korhonen, 2006). EU member states in CEE maintaining national currencies and independent monetary policies along with candidate countries from the Western Balkans negotiating to join the EU in the near future are particularly susceptible to asymmetric shocks.
Fiscal harmonization in view of the Euro adoption: Economic implications for Poland
2021, Journal of Policy ModelingInflation targeting: Genuine effects or publication selection bias?
2020, European Economic ReviewMacroeconomic impact of Basel III: Evidence from a meta-analysis
2020, Journal of Banking and FinanceBorrower-based macroprudential measures and credit growth: How biased is the existing literature?
2024, Journal of Economic Surveys