Does trade integration contribute to synchronization of shocks in Europe?

This paper examines the two related questions: convergence of shocks in NMS to their EU counterparts through time and the effect of trade integration on distributions of shocks. The decision to adopt the euro will be associated with higher implicit costs for new EU member states (NMS) with a more asymmetric shock structure. I employ the Kalman filter to calculate time varying regression coefficients relating previously identified structural shocks in NMS and the EU. Results in general show no convergence for long run shocks identified based on Blanchard-Quah restrictions. Supply and demand shocks do not become increasingly symmetric. Results suggest that the catching up process in NMS is slowing down. Additionally, there is no strong evidence suggesting that trade integration increased synchronization of shocks between the existing EU members and the newcomers. This is true also fro the period after joining the union.