Are the Baltic Countries Ready to Adopt the Euro? A Generalized Purchasing Power Parity Approach

26 Pages Posted: 21 Apr 2011

See all articles by Guglielmo Maria Caporale

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance; London South Bank University; CESifo (Center for Economic Studies and Ifo Institute); German Institute for Economic Research (DIW Berlin)

Davide Ciferri

John Cabot University; Luiss Guido Carli University

Alessandro Girardi

National Institute of Statistics (ISTAT)

Abstract

This paper analyses macroeconomic interdependencies between the Euro area and three transition economies (Estonia, Lithuania and Latvia), and whether the latter are ready to adopt the Euro. The theoretical framework is based on the generalized purchasing power parity hypothesis, which is empirically tested within a vector error correction model. Using monthly observations over the period 1993-2005, it is found that the generalized purchasing power parity hypothesis holds for the real exchange rate vis-a-vis the Euro of each Baltic country, reflecting a degree of real convergence consistent with optimum currency area criteria. Further, the chosen model outperforms alternative ones in terms of out-of-sample forecasts.

Suggested Citation

Caporale, Guglielmo Maria and Ciferri, Davide and Girardi, Alessandro, Are the Baltic Countries Ready to Adopt the Euro? A Generalized Purchasing Power Parity Approach. The Manchester School, Vol. 79, No. 3, pp. 429-454, 2011, Available at SSRN: https://ssrn.com/abstract=1817144 or http://dx.doi.org/10.1111/j.1467-9957.2009.02158.x

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance ( email )

Kingston Lane
Marie Jahoda Building
Uxbridge, Middlesex UB8 3PH
United Kingdom
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HOME PAGE: http://www.brunel.ac.uk/about/acad/bbs/bbsstaff/ef_staff/guglielmocaporale/

London South Bank University ( email )

Centre for Monetary and Financial Economics
London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

Davide Ciferri (Contact Author)

John Cabot University ( email )

Via della Lungara 233
Rome, 00165
Italy

Luiss Guido Carli University

Roma

Alessandro Girardi

National Institute of Statistics (ISTAT) ( email )

Via Cesare Balbo 16
00184 Rome, 0185
Italy

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