EU Enlargement and Trade Integration: Lessons from a Gravity Model

The authors estimate gravity models using a large panel of bilateral trade flows across 61 countries between 1980 and 2003, which are applied as a benchmark for the integration of Central and South Eastern European countries with the euro area. They show that a careful examination of the fixed effects of the model is crucial for the proper interpretation of the results. The results suggest that trade integration between most new EU member states and the euro area is already relatively advanced, while the remaining Central and Eastern European countries have significant scope to strengthen trade links with the euro area.     

The Endogeneity of the Optimum Currency Area Criteria, Intra-industry Trade, and EMU Enlargement

This article tests the endogeneity hypothesis of optimum currency area (OCA) criteria in a cross-section of OECD countries in the 1990s. It argues that intraindustry trade induces convergence of business cycles, while no direct relation between business cycles and bilateral trade intensity is found. This finding confirms the OCA endogeneity hypothesis, but it underlines the role of trade specialization. Furthermore, the endogeneity of OCA criteria implies a comparable degree of business cycle harmonization of Central and Eastern European countries with the EU as for the current members in the medium run. (JEL F15 , F41 )     

International transmission of business cycles: Evidence from dynamic correlations

We exploit dynamic correlations to estimate determinants of output comovement between OECD countries. Trade intensity, financial integration, and specialization patterns have significantly different effects on comovements at different frequencies. This sheds more light on previous results based on statistical filters.     

Fundamentals, the exchange rate and prospects for the current and future EU enlargements: evidence from Bulgaria, Croatia, Romania and Turkey

We analyze the link between macroeconomic fundamentals and exchange rate dynamics in two new and two potential EU member states: Bulgaria, Romania, Croatia, and Turkey. Given the different institutional settings of the exchange rate market in the countries of interest, we follow two different modelling strategies. For Romania and Turkey, we evaluate possible exchange rate misalignments based on a monetary model of exchange rate determination. In the case of Bulgaria and Croatia, with currency board and narrow-band peg arrangements against the euro, we discuss possible exit strategies and quantitatively assess the effects of the peg arrangements by means of simulation.

Fire the manager to improve performance?Managerial turnover and incentives after privatization in the Czech Republic

This paper analyses the effect of the introduction of managerial incentives and new human capital on enterprise performance immediately after privatization in the Czech Republic. We find weak evidence for the presence of managerial incentives: only from 1997, 3 to 4 years after privatization, does poor performance significantly increase the probability of managerial change. Nevertheless, replacing the managing director in a newly privatized firm improves subsequent performance. This indicates that the privatized firms operate below potential under the incumbent management. We show that the institutional framework matters as well: managerial turnover improves performance only if the management is closely interconnected with the board of directors and thus holds effective executive authority.     

Trade Structure during Accession to the EU

This article discusses the degree of trade restructuring between the EU and the new member states during the accession process. Intra-industry trade is selected as a composite indicator of trade structure. Factor endowments, market size and distance are the most important determinants of intra-industry trade. The estimations for the OECD countries are used to compute predictions for EU15 trade with the CEE countries. In general, this approach predicts well the EU15 trade structure with CEE, which proves significant restructuring in the new member states. High shares of intra-industry trade imply lower welfare losses and less resistance to further deepening of integration in the participating countries.     

The core and periphery of the world economy

This paper reviews three models of foreign trade, including the Heckscher-Ohlin model, the new trade theory based on increasing returns to scale, and the model of economic geography and trade with agglomeration effects. It demonstrates that gravity models perform relatively well for differentiated and non-differentiated products. This result supports Hummels' and Levinsohn's () critique of the new theory foundation of the gravity equation. Furthermore, the bilateral trade relations of peripheral countries are often identified as outliers. This pattern of outliers is consistent with the model of geography and trade.     

Households’ foreign currency borrowing in Central and Eastern Europe

Foreign currency loans represent an important feature of recent financial developments in CEECs. This might pose a serious challenge for macroeconomic stability. Against this background, we study the determinants of foreign currency loans of households, using data on the behavior of households in nine CEECs. Our results reveal that foreign currency loans are driven by households’ lack of trust in the stability of the local currency and in domestic financial institutions. Moreover, special factors including remittances and expectations of euro adoption play an important role in selected regions. The financial crisis reduced foreign currency borrowing, but there is some indication this effect might be only temporary.     

Languages in the European Union: The quest for equality and its cost

The European Union has recently expanded from 15 to 25 countries, bringing the number of official languages to 20. Currently, the EU extends equal treatment to all member countries’ official languages. This, however, is costly, especially since many Europeans speak one of the procedural languages, English, French or German, either as a native or a foreign language. We develop a simple theoretical model of linguistic-regime choice in a multilingual society and apply the model's insights to the case of the EU: we compute disenfranchisement rates that would result from using only the three procedural languages for all EU business and then proceed to quantify the average cost per person and cost per disenfranchised person associated with providing translations and interpreting into the remaining languages. Both the disenfranchisement rates and costs are shown to vary substantially across the different languages, raising important questions about the economic efficiency of equal treatment for all languages. We argue that an efficient solution would be to decentralize the provision of translations.     

Poland's Accession to the European Union: Demand for Protection of Selected Sensitive Products

This paper analyses the expected changes in external tariffs and imports in Poland after accession to the European Union. We find that around 14% of all manufacturing commodity groups in the Harmonised System will experience tariff reductions of over 10 percentage points, while for agricultural goods tariff comparisons are complicated by very different tariff systems and may be overrated, since applied tariffs are often lower than those legislated. Based on gravity estimates we also find onlly few relatively narrowly defined commodities will experience import growth rates of above 20%. More widely defined sensitive commodities are subject to much smaller but still important import growth