How Synchronized are New EU Member States With the Euro Area? Evidence from a Structural Factor Model

Abstract

A high degree of cyclical synchronization between the new EU member states (NMS) from Central and Eastern Europe and the euro area is considered to be a prerequisite for successful enlargement of the European Monetary Union. In this paper, we establish stylized facts on economic linkages between NMS and the euro area using dynamic correlation and cohesion measures. Then, we identify the main structural common euro-area shocks and investigate their transmission to NMS by means of a large-scale factor model. Finally, we compare it to the propagation to current EMU members.

Keywords: Dynamic factor models, international business cycles, EMU enlargement, sign restrictions

JEL Classification: F41, F42, E5, C3