AN INVESTIGATION OF THE GERMAN DOMINANCE HYPOTHESIS IN THE CONTEXT OF EASTERN ENLARGEMENT OF THE EU
German Dominance Hypothesis, integration, vector error correction mechanism
This paper is aimed at testing the German Dominance Hypothesis (GDH) in the context of Eastern enlargement of the EU based on the hitherto unexamined former Eastern Bloc countries of Slovakia and Czech Republic using macroeconomic data spanning the period between 1991 and 2004. Cointegration analysis and a vector error correction mechanism validate the GDH. This finding raises the question of what drives these linkages and causes them to register these characteristics. While one could make the case that the Treaty of Maastricht may have caused some form of macroeconomic convergence and thus cointegration, it could also well be argued that, given our country sample and the fact that our data refers to the interbank market, these linkages may be more resulting from changes in the European banking sector and financial markets as the latter prepared for the adoption of the euro and responded to the harmonization of European banking and financial market regulations via the EU Banking Directives.
vector error correction mechanism, integration, German Dominance Hypothesis
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