How Interdependent are Eastern European Economies and the Euro Area?

Abstract

This article investigates the interrelations between the Euro area and five Central and Eastern European economies. Using an open economy framework, we derive theoretical restrictions to be imposed on the cointegration space of a structural vector error correction model. We employ generalized impulse response analysis to assess the effects of shocks in output, interest rates, the exchange rate, and relative prices on both areas. The results show strong international spillovers in output with the magnitude being similarly strong in both areas. Furthermore, we find multiplier effects in Central and Eastern Europe and some evidence for the European Central Bank’s desire toward price stability.

Keywords: European Economic Integration, Structural Vector Error Correction Model, Generalized Impulse Response Analysis, International Transmission of Shocks

JEL Classification: C11, C32, F41