Optimum currency areas, real and nominal convergence in the European Union (original) (raw)
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The Assessment of Convergence in the EU Using the Optimum Currency Area Index
. It can be overall examined using the Optimum Currency Area (OCA) index. The OCA index can be used as a tool for assessing the possibilities of successful working of countries in the single currency area and can help to avoid some negative effects of entering unsuitable countries to euro area. However, it is also used to assess the level and development of structural convergence in the EU in general. It can be then interpreted as a "level of convergence or variability" of particular EU country in relation to comparative economy. The OCA index is computed for EU members using panel regression in the period 1999-2009. Particular components of OCA index are also important factors of convergence. Other factor that is able to influence the development of the OCA index is the hypothesis of endogeneities of OCA. External shocks have influence on convergence and development of OCA index as well. There arises the necessity to assess the euro area entry possibilities of non-members carefully due to problems of current euro area. Countries can benefit from participation in euro area. The most important longterm impact of deepening integration and particularly euro area membership is the impact on economic growth. However, the level of structural convergence can be crucial for it. The aim of this paper is using the OCA index to assess the convergence in terms of OCA in the EU and describe aspects of global financial crisis for convergence process as well.
European Monetary Union: nominal convergence, real divergence and slow growth?
Structural Change and Economic Dynamics, 2005
It is now widely acknowledged that the structural characteristics of the countries to form the European Monetary Union (EMU) did not meet the conditions of an optimum currency area (OCA) when the euro was introduced in 1999. The OCA criteria appear to have little relevance for monetary integration, because they fail to capture the importance of macroeconomic policy institutions for growth and convergence across a currency union. This paper examines the effects of the EMU framework for monetary, fiscal and wage policies on overall growth and on convergence across the euro area. It is concluded that the years before and after the introduction of the euro were characterized by a restrictive policy mix that has not been conducive to aggregate growth nor to real convergence.
Nominal and Real Convergence in the Euro Area
SEA: Practical Application of Science, 2015
The problem of the economic convergence and divergence in the European economic integration process falls within the current concerns of specialists within the economic field. In this sense, the present study addresses the issues of the economic convergence and divergence analysis, both at the level of the Member States and of the candidate countries to the Economic and Monetary Union. This paper aims at the process of European economic integration on the two axes: the nominal and the real one. The analysis results show the need for prior harmonization of the real and nominal convergence process towards joining the euro area, in order to prevent slipping after the adoption of the single currency. The nominal convergence process from the candidate countries needs also a coherent setting of speed and sequence so as not to cause delays and distortions in the development of the real convergence.
Purpose – A spectre is hunting embryonic African monetary zones: the EMU crisis. This paper assesses real, monetary and fiscal policy convergence within the proposed WAM and EAM zones. The introduction of common currencies in West and East Africa is facing stiff challenges in the timing of monetary convergence, the imperative of central bankers to apply common modeling and forecasting methods of monetary policy transmission, as well as the requirements of common structural and institutional characteristics among candidate states. Design/methodology/approach – In the analysis: monetary policy targets inflation and financial dynamics of depth, efficiency, activity and size; real sector policy targets economic performance in terms of GDP growth at macro and micro levels; while, fiscal policy targets debt-to-GDP and deficit-to-GDP ratios. A dynamic panel GMM estimation with data from different non-overlapping intervals is employed. The implied rate of convergence and the time required to achieve full (100%) convergence are then computed from the estimations. Findings – Findings suggest overwhelming lack of convergence: (1) initial conditions for financial development are different across countries; (2) fundamental characteristics as common monetary policy initiatives and IMF backed financial reform programs are implemented differently across countries; (3) there is remarkable evidence of cross-country variations in structural characteristics of macroeconomic performance; (4) institutional cross-country differences could also be responsible for the deficiency in convergence within the potential monetary zones; (5) absence of fiscal policy convergence and no potential for eliminating idiosyncratic fiscal shocks due to business cycle incoherence. Practical implications – As a policy implication, heterogeneous structural and institutional characteristics across countries are giving rise to different levels and patterns of financial intermediary development. Thus, member states should work towards harmonizing cross-country differences in structural and institutional characteristics that hamper the effectiveness of convergence in monetary, real and fiscal policies. This could be done by stringently monitoring the implementation of existing common initiatives and/or the adoption of new reforms programs. Originality/value – It is one of the few attempts to investigate the issue of convergence within the proposed WAM and EAM unions.
Inflation convergence in Central and Eastern Europe with a view to adopting the euro
In this paper we consider inflation rate differentials between seven Central and Eastern Countries (CEECs) and the Eurozone. We focus explicitly upon a group of CEECs given that although they are already member states, they are currently not part of the Economic and Monetary Union (EMU) and must fulfil the Maastricht convergence criteria before being able to adopt the euro. However, this group of countries does not have an opt-out clause and so must eventually adopt the single currency. Hence, considering divergence in inflation rates between each country and the Eurozone is important in that evidence of persistent differences may increase the chance of asymmetric inflationary shocks. Furthermore, once a country joins the Eurozone the operation of a country specific monetary policy is no longer an option. We explicitly test for convergence in the inflation rate differentials, incorporating non-linearities in the autoregressive parameters, fractional integration with endogenous structural changes, and also consider club convergence analysis for the CEECs over the period 1997 to 2011 based on monthly data. Our empirical findings suggest that the majority of countries experience non-linearities in the inflation rate differential, however there is only evidence of a persistent difference in three out of the seven countries. Complementary to this analysis we apply the Phillips and Sul (2007) test for club convergence and find that there is evidence that most of the CEECs converge to a common steady state.
Purpose – A spectre is hunting embryonic African monetary zones: the EMU crisis. This paper assesses real and monetary policy convergence within the proposed WAM and EAM zones. The introduction of common currencies in West and East Africa is facing stiff challenges in the timing of monetary convergence, the imperative of bankers to apply common modeling and forecasting methods of monetary policy transmission, as well as the requirements of common structural and institutional characteristics among candidate states. Design/methodology/approach – In the analysis, monetary policy targets inflation and financial dynamics of depth, efficiency, activity and size while real sector policy targets economic performance in terms of GDP growth at macro and micro levels. Findings – Findings suggest overwhelming lack of convergence: (1) initial conditions for financial development are different across countries; (2) fundamental characteristics as common monetary policy initiatives and IMF backed financial reform programs are implemented differently across countries; (3) there is remarkable evidence of cross-country variations in structural characteristics of macroeconomic performance; (4) institutional cross-country differences could also be responsible for the deficiency in convergence within the potential monetary zones. Practical implications – As a policy implication, heterogeneous structural and institutional characteristics across countries are giving rise to different levels and patterns of financial intermediary development. Thus member states should work towards harmonizing cross-country differences in structural and institutional characteristics that hamper the effectiveness of convergence in monetary and real policies. Originality/value – It is one of the few attempts to investigate the issue of convergence within the proposed WAM and EAM unions.
Coming Together or Falling Apart? An Analysis of Real Convergence in the Euro Area
2021
The advancement of the regional integration process from customs union to economic and monetary union has generated multiple benefits, but also complex challenges. In spite of the strict preconditions to join the Euro Area, one of the threats to the stability of the regional group is determined by the heterogeneous economic performances of its members. The aim of this paper is to study real convergence in the Euro Area between 2000 and 2019 by focusing on absolute and conditional β-and σ-convergence. Moreover, we have tried to conduct comparative analyses between European Union and Euro Area on the one side and the early adopters of the common currency and the new members on the other side. We have found evidence in favor of absolute β-convergence for Eurozone (19) and European Union, based on the inverse relationship between the initial level of GDP per capita and the average growth rates, but we have rejected the hypothesis for the early adopters of the euro. The average catching-up speed in the Eurozone (19) was 2.3% between 2000 and 2019, while the new members experienced higher growth rates, exceeding 4%. Moreover, we have accepted the hypothesis of conditional β-convergence, also illustrating that investment, trade, domestic credit provided to private sector and real labor productivity have positively influenced the GDP per capita growth rates both in the European Union and Eurozone. Finally, σ-convergence suggested that income gaps diminished within European Union and Eurozone (19) between 2000 and 2019, this trend being determined by the progress achieved by the new members.
Does ECOWAS Macroeconomic Convergence Criteria Satisfy an Optimum Currency Area?
Journal of Economics and Management Sciences
The Economic Community of West African States (ECOWAS) countries have expressed their desire to establish a monetary union by the year 2020 based on six macroeconomic convergence criteria. The desire is predicated on a series of strategies and various treaties ratified and signed by various ECOWAS Heads of governments and Central Banks’ Governors with more emphasis on the Maastricht-type set of convergence criteria that must be satisfied by all member countries before they ascend to the envisaged monetary union. Even though the convergence criteria may guarantee macroeconomic stability in a regional grouping, critics assert that the convergence criteria are insufficient and inconsequential to the formation of monetary union. The objective of this study is to ascertain whether ECOWAS countries have met all the macroeconomic convergence criteria making them fit for a monetary union. The analyses indicate that no ECOWAS country has met all the convergence criteria at a given point in t...