Do Candidate Countries Fit the Optimum-Currency-Area Criteria?

Abstract

This paper attempts to assess the degree to which CEE candidate countries fulfill Optimal Currency Area criteria set out in the literature. The literature review provided focuses on the seminal contributions of Mundell (1961) and McKinnon (1963) and later evolution of the theory as well as papers related to CEE candidate countries. The empirical analysis indicates that candidate countries are already very open to trade with the EU, in many cases much more open than the members of the EU themselves. Nonetheless, results of the static real activity comovements, with the exception of Hungary and Slovenia, point to weak or even negative correlations of shocks in the Euro-zone and respective acceding economies. Another approach pursued in the paper involves examining the nominal and real exchange rate variability to determine whether the exchange rate flexibility constitutes an important instrument of absorbing asymmetric shocks. From the comparison of the exchange rate stability in CEE with that ofClubMed countries in the years preceding the formation of the EMU it follows that the candidate countries as a group resemble the ClubMed countries in the early, rather than, mid 1990s.