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ARE THE BALTIC COUNTRIES READY TO ADOPT THE EURO? A GENERALIZED PURCHASING POWER PARITY APPROACH *
Author(s) -
CAPORALE GUGLIELMO MARIA,
CIFERRI DAVIDE,
GIRARDI ALESSANDRO
Publication year - 2011
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/j.1467-9957.2009.02158.x
Subject(s) - purchasing power parity , relative purchasing power parity , economics , econometrics , currency , purchasing power , interdependence , exchange rate , parity (physics) , error correction model , interest rate parity , macroeconomics , monetary economics , cointegration , political science , law , physics , particle physics
This paper analyses macroeconomic interdependencies between the Euro area and three transition economies (Estonia, Lithuania and Latvia), and whether the latter are ready to adopt the Euro. The theoretical framework is based on the generalized purchasing power parity hypothesis, which is empirically tested within a vector error correction model. Using monthly observations over the period 1993–2005, it is found that the generalized purchasing power parity hypothesis holds for the real exchange rate vis‐à‐vis the Euro of each Baltic country, reflecting a degree of real convergence consistent with optimum currency area criteria. Further, the chosen model outperforms alternative ones in terms of out‐of‐sample forecasts.