Journal of Comparative Economics 32 (2004) 202–211 www.elsevier.com/locate/jce Supply and demand shocks in accession countries to the Economic and Monetary Union Julius Horvath a,b,∗ and Attila Rátfai a a Central European University, 1051 Budapest, Hungary b Comenius University, 82005 Bratislava, Slovakia Received 15 March 2003; revised 4 February 2004 Available online 21 April 2004 Horvath, Julius, and Rátfai, Attila—Supply and demand shocks in accession countries to the Economic and Monetary Union The success of the enlarged Economic and Monetary Union (EMU) depends on the relative incidence of demand and supply shocks in both the participating and the accession countries. This paper addresses the issue using bivariate vector autoregression models for current and would-be EMU member countries. While the degree of symmetry in business cycle shocks among EMU accession countries is significant, idiosyncratic shocks between current and would-be member states dominate. Our results suggest a costly process of adjustment following EMU enlargement. Journal of Comparative Economics 32 (2) (2004) 202–211. Central European University, 1051 Budapest, Hungary; Comenius University, 82005 Bratislava, Slovakia.  2004 Association for Comparative Economic Studies. Published by Elsevier Inc. All rights reserved. JEL classification: E32 1. Introduction The potential benefits of monetary integration are manifold. Monetary unions are expected to have welfare improving allocative effects by boosting international trade and economic growth inside the currency area because of the increased stability of the exchange rate brought about by the increased credibility of the exchange rate regime (Rose, 2000). * Corresponding author. Department of International Relations and European Studies, Nador utca 9, 1051 Budapest, Hungary. E-mail address: horvathj@ceu.hu (J. Horvath). 0147-5967/$ – see front matter  2004 Association for Comparative Economic Studies. Published by Elsevier Inc. All rights reserved. doi:10.1016/j.jce.2004.02.003