Optimum Currency Area in the Eurozone

Krzysztof Beck () and Iana Okhrimenko ()
Additional contact information
Krzysztof Beck: Lazarski University
Iana Okhrimenko: Lazarski University

Open Economies Review, 2025, vol. 36, issue 1, No 7, 197-219

Abstract: Abstract We used a Bayesian dynamic factor model (BDFM) to examine the share of variance explained by the European and country factors for 59 regions in Eurozone countries in the period from 1992 to 2020. The BDFM output facilitated the construction of a criterion that enables the assessment of the cost of participation in the European Monetary Union, which is directly related to the optimum currency area theory. Over the examined period, we observed business cycle divergence, with 46 regions experiencing a drop in the share of variance explained by the European factor from 1992–2005 to 2006–2020. However, the analysis over shorter time spans demonstrated that all the regions decoupled from the European business cycle. The results contradict the predictions of "The European Commission View". On the one hand, two predictions stemming from "The Krugman View" are supported by the results: the European regions experienced a slight increase in sectoral specialization, and they experienced business cycle divergence. On the other hand, the data does not support the notion that the ongoing specialization was the underlying cause of this divergence.

Keywords: Business cycle synchronization; Bayesian dynamic factor model; European region; Euro area; Optimum currency area (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11079-024-09750-z Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:openec:v:36:y:2025:i:1:d:10.1007_s11079-024-09750-z

Ordering information: This journal article can be ordered from
http://www.springer. ... cs/journal/11079/PS2

DOI: 10.1007/s11079-024-09750-z

Access Statistics for this article

Open Economies Review is currently edited by G.S. Tavlas

More articles in Open Economies Review from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().