The Third Round of the Euro Area Enlargement: Are the Candidates Ready?

Published: 2/7/2019
Publication Working Papers
Issue W - 057
Author Milan Deskar-Škrbić, Karlo Kotarac, Davor Kunovac
Date July 2019
JEL E32, E52, F45
ISSN 1334-0131


euro area enlargement, economic shocks, BVAR, common monetary policy, Mundellian trilemma

In this paper, we study the readiness of Bulgaria, Croatia and Romania to adopt the common monetary policy of the ECB in the context of the third round of euro area enlargement. Following the later stages of the optimal currency area (OCA) theory we focus on the coherence of economic shocks between candidate countries and the euro area and analyse the relevance of euro area shocks for key macroeconomic variables in these countries. Our results, based on a novel empirical approach, show that the overall importance of those shocks that are relevant for the ECB is fairly similar in candidate countries and the euro area. The cost of joining the euro area should, therefore, not be pronounced, at least from the aspect of the adoption of the common counter-cyclical monetary policy. This conclusion holds for all three candidates, despite important differences in monetary and exchange rate regimes.