On Optimal Currency Areas and Common Cycles: Are the Acceding Countries Ready to Join the Euro?

23 Pages Posted: 16 Apr 2021

See all articles by Louisa Grimm

Louisa Grimm

Universität Osnabrück - Institute of Empirical Economic Research

Sven Steinkamp

Universität Osnabrück - Institute of Empirical Economic Research

Frank Westermann

Universität Osnabrück - Institute of Empirical Economic Research

Date Written: 2021

Abstract

The former EU president Jean-Claude Junker has proposed that all countries of the European Union should also adopt the euro as their currency and recent research has shown that countries currently pursuing this goal indeed fulfill the classical Optimal Currency Area (OCA) criterion of positively correlated shocks with the European Monetary Union (EMU). We illustrate, however, that not only the correlation of shocks but also a common impulse response pattern over time is needed for a currency area to be optimal. We test this additional OCA criterion using the concept of a common serial correlation test. The test clearly rejects the notion that the potentially acceding countries share a common cyclical response pattern with the EMU aggregate – except for Sweden. Instead, the business cycles in most of the other countries exhibit only a very weak form of codependence.

JEL Classification: C320, E320, F360

Suggested Citation

Grimm, Louisa and Steinkamp, Sven and Westermann, Frank, On Optimal Currency Areas and Common Cycles: Are the Acceding Countries Ready to Join the Euro? (2021). CESifo Working Paper No. 9016, Available at SSRN: https://ssrn.com/abstract=3830221 or http://dx.doi.org/10.2139/ssrn.3830221

Louisa Grimm (Contact Author)

Universität Osnabrück - Institute of Empirical Economic Research ( email )

Barbarastr. 12
Osnabrueck, 49076
Germany

Sven Steinkamp

Universität Osnabrück - Institute of Empirical Economic Research ( email )

Barbarastr. 12
Osnabrueck, 49076
Germany

Frank Westermann

Universität Osnabrück - Institute of Empirical Economic Research ( email )

Barbarastr. 12
Osnabrueck, 49076
Germany

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