Central European Business Cycles

Abstract

Optimal currency area (OCA) theory stresses that the comovement of the business cycles of member countries is an important criterion for a successful common currency. This study analyzes the cross-correlations of real gross domestic product and its components for six euro hopefuls from 1993 to 2008. No country is consistently matched more closely to Germany than to world output or consumption, and consumption correlations are found to be weak overall. Although the Baltic states seem to show stronger comovements with the world than with Germany, they show even closer linkages to each other, suggesting that this part of Europe forms a distinct economic subregion that may not benefit from joining the euro.