EURO ADOPTION OBLIGED COUNTRIES VIEWED BY MELITZ OPTIMUM CURRENCY AREA MODEL
Empirically applied alternative Optimum Currency Area theory model proposed by J. Mélitz. We calculated trade-weighted terms of trade covariance of several European countries bound to become Eurozone members. The higher the covariance, the higher the cost of joining the Eurozone. Considering the openness index and nominal rigidities, we ordered the countries by the (dis)advantage of joining the Eurozone. According to the model, the highest cost of joining the currency block is attributed to Croatia as its trade partners have high covariance of terms of trade. Croatia is also not as open as other countries like the Czech Republic or Hungary, showing relatively higher nominal rigidity. On the other hand, Bulgaria appears to profit from adopting the Euro the most.
Keywords: Eurozone, Optimum Currency Area