Real and Monetary Convergence within the European Union and between the European Union and Candidate Countries : A Rolling Cointegration Approach

In this paper we have examined the cointegration with German aggregates of real and nominal aggregates and prices in transition-economy candidates for EU membership and with those of countries that have recently joined the EU and with market-economy candidates for EU membership. Based on rolling cointegration tests, we find that the recent members of the EU exhibit significant and pervasive cointegration between their macroeconomic aggregates and prices and those of Germany, which we take as the historical proxy for the EU. The transition-economy candidates exhibit greater cointegration in measures of real activity, such as industrial output and in prices. There is considerably less integration in the money base and in monetary aggregates. This may reflect the dominance of real processes such as trade and capital flows over the domestic monetary policy of the transition economies. This suggests that there is considerably more leeway for monetary authorities in these economies in framing their approach to EU membership and to formulating monetary policy than previously thought