Business Cycle Correlation of the New Meber States with Eurozone - The Case of Romania

This paper assesses the degree of readiness of New Member States (NMS) of the EU, including Romania, to adopt euro, mainly based on an optimal currency area (OCA) criterium. Using three consensus measures of output gap based on revisions of the estimated output gaps computed by 5 filtering techniques and a benchmark method based on Principal Component Analysis (PCA) we estimated the business cycle correlation between NMS and eurozone. Our findings suggest that the correlation of the business cycle in the case of Romania is one of the lowest among NMS, although it increased tremendously in the last years. The main conclusion of our paper is the fact that Romania, as well as some other NMS countries still need time to progress on the real convergence criteria in order to adopt euro without major costs.

Keywords: OCA; output gap; business cycle synchronization; euro adoption; convergence
JEL Classification: E32, F41