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Business cycle synchronization and its links to trade integration in new EU member states

Publication at Faculty of Social Sciences, Faculty of Mathematics and Physics, Centre for Economic Research and Graduate Education |
2016

Abstract

This paper examines the business cycles synchronization (BCS) between the euro area and six new EU member states (NMS) - the Czech Republic, Estonia, Hungary, Poland, Slovakia and Slovenia - in order to determine the endogeneity of the optimal currency area formed by the euro area and these countries. Special attention is paid to possible impact of trade integration on BCS.

It seems that the BCS between the NMS and the euro area was catalyzed by the EU integration process until 2008 and was only slightly negatively affected by the crisis in Europe. Moreover, significant differences between countries with the European currency and without the European currency are not observed.

Afterwards, we document that the trade integration between the NMS and the euro area has continued to increase since the beginning of the transformation process in the NMS, including the crisis and post-crisis periods. Concerning the effect of the trade integration of the NMS to the European Monetary Union (EMU) on the BCS, our results indicate a positive and significant relationship.

Thus, our results are in compliance with the endogeneity hypothesis of the optimal currency area formed by the euro area and the NMS.