Similarity of Supply and Demand Shocks Between the New Member States and the Euro Zone. The Case of Romania

by Dumitru, Ionut and Dumitru, Ionela
Published in Romanian Journal of Economic Forecasting
, 2011, volume 14 issue 1, 5-19

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This paper assesses the correlation of supply and demand shocks between New Member States (NMS), including Romania, and the Eurozone. Using a structural VAR approach, we estimated the similarity between demand (both nominal and real) and supply shocks between NMS and the Eurozone, showing that the demand shocks are still negatively correlated with the Eurozone for some NMS, including Romania. Also, using a moving window, we estimated that the correlation of shocks increased over time, especially in the case of supply shocks. Even for some core members of the Eurozone, we find that the demand shocks seem to be idiosyncratic. The main conclusion of our paper is the fact that Romania, as well as some other NMS countries, still need time to become more synchronized and to avoid the occurrence of asymmetric shocks once they become members of the Eurozone.

Keywords: optimal currency area, supply and demand shocks, business cycle synchronization, euro adoption, convergence
JEL Classification:
E32, F42