The Timing of EU Expansion and the Real Exchange Rate

Abstract

This paper employs a dynamic Ricardian model to analyse the impact of the timing of EU expansion on the real exchange rate between the accession countries' currencies and the euro. I find that the real exchange rate response to EU accession is smaller in the case of a postponed accession, as postponement gives the regions more time to converge. However, early EU accession would contribute to reducing the real exchange rate response to asymmetric productivity shocks, as increased bilateral trade reduces the size of the non-tradable goods sector, making the real exchange rate less sensitive to productivity shocks.