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.