Asymmetric developments in the EU: Is the Lucas Paradox behind?

Development in European Union is showing that even despite high amount of effort in economic integration, differences in cross-country development are still at play. Indications about Lucas Paradox can be observed, due to inefficient flow of capital. Aim of this study is to quantify, whether this Lucas paradox is present in EU and how it contributes to convergence or divergence between countries. Comparison of panel VAR impulse-response functions is used for evaluation. Results suggests, that Lucas paradox can be identified between Euro area vs non-Euro area countries and Euro area core vs periphery. Furthermore, capital misallocation regarding these four groups prevents possible short-term economic convergence