Real and nominal stochastic convergence: are the new EU members ready to join the Euro zone?

Abstract

A key requirement for the new members to join the European Economic and Monetary Union (EMU) is real and financial convergence to European Union (EU) levels. This paper expands the analysis in [Kocenda, E., Macroeconomic convergence in transition economies, Journal of Comparative Economics 29 (2001) 1-23] and [Kutan, A., Yigit, T., Nominal and real stochastic convergence of transition economies, Journal of Comparative Economics 32 (2004) 23-36] by investigating the convergence of the new EU members to these standards. Using panel unit root techniques, we find strong evidence of real stochastic convergence for all new members, which indicates that they adjust to Euro-area output shocks. However, the degree of nominal convergence is idiosyncratic. The Baltic states exhibit the strongest monetary policy and price-level convergence, suggesting that they are ready to adopt the Euro. However, Central and East European countries should address the reasons for their lack of convergence before adopting the Euro. (c) 2005 Association for Comparative Economic Studies. Published by Elsevier Inc. All rights reserved.