Convergence and Shocks in the Road to EU: Empirical Investigations for Bulgaria and Romania

29 Pages Posted: 6 Jun 2006

Date Written: March 2006

Abstract

Despite their progress Bulgaria and Romania significantly differ from the EU economies. In this article, on the basis of the theoretical and empirical achievements of the theory of optimal and (endogenous) currency areas we study to what extent the two South European economies are able to adopt the common economic (and above all monetary) policy of the EU, and to what extent the convergence to the EU stimulates the economic development of these countries. Despite the similarities, the two countries now differ fundamentally in their choice of a monetary regime - while Romania uses inflation targeting and a flexible exchange rate, Bulgaria has adopted a currency board regime. For this purpose we analyze: (i) the degree of nominal, real and financial convergence and synchronization of the economic cycle with that of the European Union (using unconditional beta convergence approach). Income and price levels, inflation rate, interest rate, monetary aggregates, credit, productivity etc. are among the studied variables; (ii) the resistance to different external and internal shocks (using VAR model) as well as (iii) the mechanisms for balancing and absorption of these shocks. To give a better comparative picture we compose the panel including Hungary and Czech Republic.

Keywords: convergence, shocks, EU enlargement, Bulgaria and Romania

JEL Classification: E3, F4, P2

Suggested Citation

Figuet, Jean-Marc and Nenovsky, Nikolay, Convergence and Shocks in the Road to EU: Empirical Investigations for Bulgaria and Romania (March 2006). William Davidson Institute Working Paper No. 810, Available at SSRN: https://ssrn.com/abstract=906139 or http://dx.doi.org/10.2139/ssrn.906139

Jean-Marc Figuet (Contact Author)

LARE-efi ( email )

Avenue Leon Duguit, 33
Pessac, 608
France

Nikolay Nenovsky

Bulgarian National Bank ( email )

str "St. Sofia" 5
Sofia, 1040
Bulgaria
+ 359 2 9145 1239 (Phone)
+ 359 2 980 24 25 (Fax)

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