European Business Schools Librarian's Group

Department of Economics Working Papers,
Vienna University of Economics and Business, Department of Economics

After Two Decades of Integration: How Interdependent are Eastern European Economies and the Euro Area?

Catherine Prettner () and Klaus Prettner ()
Additional contact information
Catherine Prettner: Department of Economics, Vienna University of Economics and Business
Klaus Prettner: Harvard University, Center for Population and Development Studies

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 stability.

Keywords: European Economic Integration, Structural Vector Error Correction Model, Generalized Impulse Response Analysis

JEL-codes: C11; C32; F41 March 2012

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