Nominal and Real Convergence
of Slovak Republic and Poland to Eurozone
Rudolf Gavliak, Vladimír Úradníček, Emília Zimková
The 5th Chorzow Conference of Banking and Finance
Knowledge and Funds Transfer into the Sectors of the EU Economy
September 26 – 27, 2008
Content
1. Introduction
2. Methodology and Data
3. Outcome of Analyses
4. Conclusion
Introduction
Real
Structural
Classification of the Convergence
Nom
inal
Nominal Convergence (1)
Price stability
Public Finance Exchange Rate Interest rates
10 y
Czech
Rep.
HICP Def/HDP Debt/HDP
2006 2,1 -2,7 29,4 No 4,8 3,8
2007 3,0 -1,6 28,7 No 2,0 4,3
2008 4,4 -1,4 28,1 No 8,4 4,5
Hungary 2006 4,0 -9,2 65,5 No -6,5 7,1
2007 7,9 -5,5 66,0 No 4,9 6,7
2008 7,5 -4,0 66,5 No -2,7 6,9Source: Convergence Report 2008
Nominal Convergence (2)
Price stability
Public Finance Exchange Rate Interest rates
10 y
Poland
HICP Def/HDP Debt/HDP ERM II Apprec/Deprec
2006 1,3 -3,8 47,6 No 3,2 5,2
2007 2,6 -2,0 45,2 No 2,9 5,5
2008 3,2 -2,5 44,5 No 6,3 5,7
Slovak
Rep.
2006 4,3 -3,6 30,4 No 3,5 4,4
2007 1,9 -2,2 29,4 No 9,3 4,5
2008 2,2 -2,7 35,5 No 2,5 4,5Source: Convergence Report 2008
Structural Convergence
1. The structural convergence is analysing convergence of the economy according its sectors, employment, inovations, research, economic reforms, social and enviromental policies...
2. It is also analysing the harmonisation of the economic cycles and the synchronisation of economics shocks (Gavliak, Úradníček, Zimková, 2007, SVAR technique, the Blanchard-Quah teoretical approach).
Real Convergence
1. The real convegence can be measured by economic performance, the level of labour productivity, the level of prices and wages (Barančok, 2007)
2. Commonly used indicator to meassure the economic convergence is the gross domestic product in the purchasing power parity (HDPPPP).
Methodology
„Real economic convergence“ can be estimated by
β convergence σ convergence Cointegration and Error Correction
Models
Methodology - β convergence
β convergence is a concept which is estimating the speed of convergence of the individual country to the average of clusstered countries.
When the partial correlation between growth in income over time and its initial level is negative, there is β convergence.
Methodology - σ convergence
When the dispersion of real per capita income across a group of economies falls over time, there is σ convergence.
Methodology – Cointegration and ECM Long lasting mutual trend of analysed indicators is searched by cointegration.
In a short term there might be some deviations which are studied by error correction models (ECM).
The output is twofold: we analyze the long-lasting equilibrium of the real economy and secondly we estimate the duration whithin which the searched variables are returning to the long-lasting equilibrium in the case of the short-term deviations.
Methodology – Cointegration and ECM
The cointegrating equations may have intercepts and deterministic trends
We provided tests for the following five possibilities considered by Johansen
Johansen tests
1. Series y have no deterministic trends and the cointegrating equations do not have intercepts
2. Series y have no deterministic trends and the cointegrating equations have intercepts
2 1 1: .t t tH r Πy Bx y
*1 1 1 0: .t t tH r Πy Bx y
Johansen tests
3. Series y have linear trends but the cointegrating equations have only intercepts:
4. Both series y and the cointegrating equations have linear trends:
1 1 1 0 0: .t t tH r Πy Bx y
*1 1 0 1 0: .t t tH r Πy Bx y t
Johansen tests
5. Series y have quadratic trends and the cointegrating equations have linear trends:
where is the (non-unique) k x (k - r) matrix such that and
1 1 0 1 0 1: .t t tH r Πy Bx y t t
0 .rank k
Data and Software
For analyses were used quarterly input data from Eurostat datasource
We analysed detrended data from first quarter 2000 till the fist quarter 2008
EViews 4 software
Empirical Results
of Cointegration analyses – case of Slovakia
The cointegration equation, which is characterising the long-lasting equilibrium, has the following specification:
where
– y-on-y growth of the Gross Domestic Product in Slovakia (in %),
– y-on-y growth of the Gross Domestic Product in Euroarea (in %).
SKg
EAg
EA,g,873 =SKg
Empirical Results of Cointegration analyses – case of Slovakia
Error Correction Coefficients estimated in the Error Correction Model
D(RASTHDP_SR) -0.164680 (0.05673)
D(RASTHDP_EA12) 0.099963 (0.05393)
Empirical Results
of Cointegration analyses – case of Poland
The cointegration equation, which is characterising the long-lasting equilibrium, has the following specification:
where
– y-on-y growth of the Gross Domestic Product in Poland (in %),
– y-on-y growth of the Gross Domestic Product in Euroarea (in %).
EAg
EA,PL g,721 =g
PLg
Empirical Results of Cointegration analyses – case of Poland
Error Correction Coefficients estimated in the Error Correction Model
D(RASTHDP_PL) -0.1488 (0.06414)
D(RASTHDP_EA12) 0.132470 (0.06315)
Conclusion
The results of cointegration analyses proved solid the real convergence of the Slovak Republic and Poland to Euroarea.
The entry of both countries to the EMU might be a new incentive to the dynamic economic development.
To speed up this proces the implementation of the responsible economic, fiscal and labour market policies, the introduction a new structure of the economy based on the new technologies are requested.