Working papers, Department of Economics, WU (Wirtschaftsuniversität Wien)
After Two Decades of Integration: How Interdependent are Eastern European Economies and the Euro Area?
() and Klaus Prettner
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
Keywords: European Economic Integration, Structural Vector Error Correction Model, Generalized Impulse Response Analysis; (follow links to similar papers)
JEL-Codes: C11,; C32,; F41; (follow links to similar papers)
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