DP2119 An Optimal Currency Area Perspective of the EU Enlargement to the CEECs

Author(s): Laurence Boone, Mathilde Maurel
Publication Date: March 1999
Keyword(s): eastern enlargement, Economics of Transition, Optimal Currency Area
JEL(s): E32, F3, F42
Programme Areas: Transition Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2119

This paper tries to assess whether it would be optimal for the CEECs to form a monetary union with either Germany or the EU. This cannot be done without discussing first the Maastricht criteria, which are the condition « sine qua non » for a country to be eligible. Yet, they are often independent from more structural criteria (Bayoumi and Eichengreen (1996b)). Hence, this paper argues that although the CEECs do not satisfy -yet- the Maastricht criteria, their economic cycle is close enough to that of the EU and Germany for a monetary union to bring them great benefits. Indeed, using a methodology derived by L. Reichlin and M. Forni (1997) and C. Fuss (1997), it can be shown that (i) the percentage of CEECs business cycle fluctuations explained by a German shock is very high,; (ii) furthermore, the impulse responses are positively correlated. These suggest that the CEECs would not suffer from a common monetary policy .