How interdependent are Eastern European economies and the Euro area?

• Eastern Europe and the Euro area are highly integrated.
• Economic shocks have sizeable impacts on the corresponding other region.
• Shocks to output in Eastern Europe substantially affect output of the Euro area.

This article investigates the interrelations between the Euro area and five Central and Eastern European economies. Using an open economy framework, we derive theoretical restrictions to be imposed on the cointegration space of a structural vector error correction model. We employ generalized impulse response analysis to assess the effects of shocks to output, interest rates, the exchange rate, and relative prices on both areas. The results show strong inter-regional spillovers of output shocks with the magnitude being similarly strong in both areas. Furthermore, we find multiplier effects in Central and Eastern Europe and some evidence for the European Central Bank's desire for price stability.