1. ¹Oesterreichische Nationalbank, Foreign Research Division, PO Box 61, A-1011 Vienna, Austria, E-mail: Jarko.Fidrmuc@OeNB.at
2. ²Comenius University Bratislava, Department of Economic and Financial Models, Slovakia
3. ³Institute for Economies in Transition, Bank of Finland, PO Box 160, 00101 Helsinki, Finland. E-mail: iikka.korhonen@bof.fi

Abstract

We assess the correlation of supply and demand shocks between current countries in the euro area and European Union (EU) accession candidates from 1993/1995 to 2002. Supply and demand shocks are recovered from estimated structural vector autoregressive models of output growth and inflation. Notably, the economic slowdown between 2000 and 2002 increased heterogeneity of business cycles between the euro area and acceding counties. We find that several acceding countries have a quite high correlation of underlying shocks with the euro area and conclude that continuing integration within the EU is likely to align the business cycles of these countries in a manner similar to the synchronisation of supply and demand shocks that we document for the EU in the 1990s.