Advertisement

Economic Change and Restructuring

, Volume 39, Issue 1–2, pp 19–34 | Cite as

Measuring the correlation of shocks between the EU15 and the new member countries

  • Stephen G. Hall
  • George Hondroyiannis
Article
  • 64 Downloads

Abstract

This paper considers the question of the symmetry of inflation, exchange rate changes and GDP shocks between the EU15 and the new member countries. It applies a relatively new technique, the orthogonal GARCH model, which allows us to calculate a complete time varying correlation matrix for these countries. We can then examine the way the conditional correlation of shocks between the EU15 and the new member countries has been evolving over time. Our results suggest that the shocks which hit the EU are not symmetrical with those affecting the majority of new member countries. In addition, most of the new member countries seem to exhibit relatively low correlation with EU15.

Keywords

Business cycle GARCH 

JEL Classifications

E32 C22 

Notes

Acknowledgements

The authors wish to thank Heather Gibson and the participants at the Euro Area Business Cycle Network (EABCN) Workshop on Business Cycle and Acceding Countries, Vienna 23/24 April 2004, for discussions and helpful comments on a previous version of this paper. Financial Support from ESRC grant No L138250122 is gratefully acknowledged from the first author. The views expressed in this paper are those of the authors and not those of the Bank of Greece.

References

  1. Alesina A, Barro RJ (2002) Curency Unions. Quarterly Journal of Economics 117:409–436CrossRefGoogle Scholar
  2. Artis MJ (2002) Reflections on the Optimal Currency Area (OCA) Criteria in the Light of EMU. Osterreichische Nationalbank Working paper No 69Google Scholar
  3. Bollerslev T, Engle RF, Wooldridge JM (1988) A Capital Asset Pricing Model with Time Varying Covariances. Journal of Political Economy 96:116–131CrossRefGoogle Scholar
  4. Buiter W (1999) Optimal Currency Areas: Why does the Exchange Rate Regime Matter? (with an application to UK membership of EMU). Sixth Royal Bank of Scotland lecture at the Scottish Economic Society annual conferenceGoogle Scholar
  5. Ding Z (1994) ‘Time Series Analysis of Speculative returns’ PhD thesis UCSDGoogle Scholar
  6. Engle RF, Kroner KF (1995) Multivariate Simultaneous Generalized ARCH. Econometric Theory 11(1):122–50CrossRefGoogle Scholar
  7. Frankel J, Rose A (1997) Is EMU more Justifiable Ex-Post than Ex-Anti?. European Economic Review 41:753–760CrossRefGoogle Scholar
  8. Gibson HD, Tsakalotos E (2004) Capital Flows and Speculative Attacks in Prospective EU Member States. Economics of Transition 12:559–586CrossRefGoogle Scholar
  9. Hall SG, Miles DK, Taylor MP (1990) A Multivariate GARCH in Mean Estimation of the Capital Asset Pricing Model. In: Patterson K, Henry SGB (eds) Economic Modelling at the Bank of England. Chapman and Hall, LondonGoogle Scholar
  10. Hall SG, Miles DK (1992) An Empirical Study of Recent Trends in World Bond Markets. Oxford Economic Papers 44:599–625Google Scholar
  11. Kraft DF, Engle RF (1982) Autoregressive Conditional Heteroskedasticity in Multiple Time Series. UCSD manuscriptGoogle Scholar
  12. McCallum BT (1999) ‘Theoretical Issues Pertaining to Monetary Unions’ NBER working paper No 7393Google Scholar
  13. McKinnon RI (1963) Optimum Currency Areas. American Economic Review 53:717–725Google Scholar
  14. McKinnon RI (1994) A Common Monetary Standard or a Common Currency for Europe Fiscal Lessons from the United States. Scottish Journal of Political Economy 41:337–357CrossRefGoogle Scholar
  15. Mundell RA (1961) A Theory of Optimal Currency Areas. American Economic Review 51:657–665Google Scholar
  16. Rogoff K (2001) On why not a Global Currency. American Economic Review 91:243–247CrossRefGoogle Scholar
  17. Van der Weide R (2002) GO-GARCH: A Multivariate Generalized Orthogonal GARCH Model. Journal of Applied Econometrics. 17:549–564CrossRefGoogle Scholar
  18. Yhap B (2003) ‘The Analysis of Principal Component GARCH models in Value-at-Risk calculations’ London University PhD thesisGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  1. 1.Department of EconomicsLeicester University LeicesterUK
  2. 2.National Institute of Economic and Social Research (NIESR)LondonUK
  3. 3.Economic Research DepartmentBank of GreeceAthensGreece
  4. 4.Harokopio UniversityAthensGreece

Personalised recommendations