How synchronized are new EU member states with the euro area? Evidence from a structural factor model

A high degree of cyclical synchronization between the new EU member states (NMS) from Central and Eastern Europe and the euro area is considered to be a prerequisite for successful enlargement of the European Monetary Union. In this paper, we establish stylized facts on economic linkages between NMS and the euro area using dynamic correlation and cohesion measures. Then, we identify the main structural common euro-area shocks and investigate their transmission to NMS by means of a large-scale factor model. Finally, we compare it to the propagation to current EMU members. Journal of Comparative Economics 34 (3) (2006) 538-563. Deutsche Bundesbank, Frankfurt/M., Germany; University of Cologne, Cologne, Germany; University of Bonn, Institute of Econometrics, Adenauerallee 24-42, D-53113 Bonn, Germany. (c) 2006 Association for Comparative Economic Studies. Published by Elsevier Inc. All rights reserved.