Are the Baltic Countries Ready to Adopt the Euro? A Generalised Purchasing Power Parity Approach

39 Pages Posted: 30 Jul 2008

See all articles by Guglielmo Maria Caporale

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance; London South Bank University; CESifo (Center for Economic Studies and Ifo Institute); German Institute for Economic Research (DIW Berlin)

Davide Ciferri

John Cabot University; Luiss Guido Carli University

Alessandro Girardi

National Institute of Statistics (ISTAT)

Date Written: July 2008

Abstract

This paper focuses on macroeconomic interdependencies between the Euro area and three transition economies (Estonia, Lithuania and Latvia), with the aim of establishing whether the latter are ready to adopt the Euro. The theoretical framework is based on the Generalised Purchasing Power Parity (GPPP) hypothesis, which is empirically tested within a Vector Error Correction (VEC) model. Using both monthly and quarterly data over the period 1993-2005, it is found that GPPP holds for the real exchange rate vis-a-vis the Euro of each Baltic country, reflecting a degree of real convergence consistent with Optimum Currency Area criteria. Further, the adopted joint modelling approach for the real exchange rates of the Baltic region outperforms a number of alternative models in terms of out-of-sample forecasts.

Keywords: transition economies, Euro area, (Generalised) Purchasing Power Parity, Vector Error Correction models

JEL Classification: C32, E00, F36

Suggested Citation

Caporale, Guglielmo Maria and Ciferri, Davide and Girardi, Alessandro, Are the Baltic Countries Ready to Adopt the Euro? A Generalised Purchasing Power Parity Approach (July 2008). CESifo Working Paper Series No. 2359, Available at SSRN: https://ssrn.com/abstract=1187662

Guglielmo Maria Caporale (Contact Author)

Brunel University London - Department of Economics and Finance ( email )

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HOME PAGE: http://www.brunel.ac.uk/about/acad/bbs/bbsstaff/ef_staff/guglielmocaporale/

London South Bank University ( email )

Centre for Monetary and Financial Economics
London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

German Institute for Economic Research (DIW Berlin) ( email )

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Berlin, 10117
Germany

Davide Ciferri

John Cabot University ( email )

Via della Lungara 233
Rome, 00165
Italy

Luiss Guido Carli University

Roma

Alessandro Girardi

National Institute of Statistics (ISTAT) ( email )

Via Cesare Balbo 16
00184 Rome, 0185
Italy

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