Business cycle convergence in EMU : A first look at the second moment *

We analyse the dynamics of the standard deviation of demand and supply shocks as well as of the demand component of GDP across countries in the European Monetary Union (EMU). This analysis allows us to evaluate the patterns of cyclical comovement in EMU and compare them to the cyclical performance of the new members of the European Union (EU) and other OECD countries. We make use of sigma-convergence methods to identify synchronization patterns in business cycles. The Eurozone has converged to a stable lower level of dispersion across business cycles during the end of the 80s and the beginning of the 90s. The new EU members are relatively well synchronized with the EMU, and an enlargement of the EMU to 22 members would not significantly decrease its optimality as a currency area. There is evidence for some Europe-specific characteristics as compared to global comovements in business cycles.

[1]  A. Rose,et al.  One money, one market : the effect of common currencies on trade , 2000 .

[2]  H. Uhlig.  What are the Effects of Monetary Policy on Output? : Results from an Agnostic Identification Procedure , 2005 .

[3]  Gérard Roland,et al.  The Political Economy of Transition , 2002 .

[4]  S. Waelti.  Stock market synchronization and monetary integration , 2011 .

[5]  P. Krugman.  Geography and Trade , 1992 .

[6]  Jan Svejnar.  Journal of Economic Perspectives—Volume 16, Number 1—Winter 2002—Pages 3–28 Transition Economies: Performance and Challenges , 2022 .

[7]  Kurt Annen,et al.  HP-Filter DLL executable , 2006 .

[8]  M. Spiegel,et al.  Federal Reserve Bank of San Francisco Working Paper Series Monetary and Financial Integration in the Emu: Push or Pull? Monetary and Financial Integration in the Emu: Push or Pull? , 2022 .

[9]  T. Boeri,et al.  Are labour markets in the new member states sufficiently flexible for EMU , 2006 .

[10]  G. Tavlas.  The ‘New’ Theory of Optimum Currency Areas , 1993 .

[11]  M. Virén,et al.  Changes in behaviour under EMU , 2009 .

[12]  E. Prescott,et al.  Great depressions of the 20th century , 2002 .

[13]  Adrian Pagan,et al.  The Econometric Analysis of Constructed Binary Time Series. Working paper #1 , 2006 .

[14]  A. Sapir,et al.  Economic policy in EMU , 1998 .

[15]  F. Mongelli,et al.  Endogeneities of Optimum Currency Areas: What Brings Countries Sharing a Single Currency Closer Together? , 2005, SSRN Electronic Journal.

[16]  J. Fidrmuc.  The Endogeneity of the Optimum Currency Area Criteria , 2004 .

[17]  G. Schwarz.  Estimating the Dimension of a Model , 1978 .

[18]  P. Phillips,et al.  Testing the null hypothesis of stationarity against the alternative of a unit root: How sure are we that economic time series have a unit root? , 1992 .

[19]  A. Rose,et al.  The Endogeneity of the Optimum Currency Area Criteria , 1996 .

[20]  T. Kehoe,et al.  Modeling Great Depressions: The Depression in Finland in the 1990s , 2007 .

[21]  Olivier J. Blanchard,et al.  The Dynamic Effects of Aggregate Demand and Supply Disturbances , 1988 .

[22]  R. Mundell.  A Theory of Optimum Currency Areas , 1961 .

[23]  L. Hurwicz,et al.  Measuring Business Cycles. , 1946 .

[24]  João Silvestre,et al.  The Shrinking Endogeneity of Optimum Currency Areas Criteria , 2007 .

[25]  A. Pagan,et al.  Sign Restrictions in Structural Vector Autoregressions: A Critical Review , 2010 .

[26]  Fabio Canova,et al.  Does Detrending Matter for the Determination of the Reference Cycle and the Selection of Turning Points , 1999 .

[27]  F. Coricelli,et al.  Non-Linear Growth Effects of Financial Development: Does Financial Integration Matter? , 2007 .

[28]  Mark A. Wynne,et al.  Business Cycles under Monetary Union: A Comparison of the EU and US , 2000 .

[29]  FISCAL CONVERGENCE BEFORE ENTERING , 2006 .

[30]  Marianne Baxter,et al.  Measuring Business Cycles: Approximate Band-Pass Filters for Economic Time Series , 1995, Review of Economics and Statistics.

[31]  P. Levine,et al.  Fiscal Policy Coordination and EMU: A Dynamic Game Approach , 1994 .

[32]  E. Prescott,et al.  Data Appendix to Great Depressions of the Twentieth Century , 2002 .

[33]  Paul De Grauwe,et al.  Economics of monetary union , 2012 .

[34]  Edward C. Prescott,et al.  FORTRAN code for the Hodrick-Prescott filter , 1982 .

[35]  Jakob de Haan,et al.  Trade and Business Cycle Synchronization in OECD Countries: A Re-Examination , 2005, SSRN Electronic Journal.

[36]  M. Huchet.  Does single monetary policy have asymmetric real effects in EMU , 2003 .

[37]  Jakob de Haan,et al.  Will Business Cycles in the Euro Area Converge? A Critical Survey of Empirical Research , 2008 .

[38]  Pavlos Petroulas,et al.  The effect of the euro on foreign direct investment , 2007, SSRN Electronic Journal.

[39]  Uwe Böwer,et al.  Determinants of Business Cycle Synchronisation Across Euro Area Countries , 2006, SSRN Electronic Journal.

[40]  Simon van Norden,et al.  GAUSS code for the Hodrick-Prescott filter , 1995 .

[41]  Filtered least squares and measurement error , 1998 .

[42]  Ignazio Angeloni,et al.  From the Erm to the Euro: New Evidence on Economic and Policy Convergence Among EU Countries , 1999, SSRN Electronic Journal.

[43]  António Afonso,et al.  EMU enlargement, stabilization costs and insurance mechanisms , 2008 .

[44]  P. Grauwe.  The Political Economy of Monetary Union in Europe , 1993 .

[45]  P. Grauwe,et al.  Do asymmetries matter for European monetary policy , 2002 .

[46]  Çiğdem Akın.  Multiple Determinants of Business Cycle Synchronization , 2012 .

[47]  N. Christodoulakis,et al.  Comparisons of Business Cycles in the EC: Idiosyncracies and Regularities , 1995 .

[48]  Robert Inklaar,et al.  Is there really a European business cycle? A comment , 2001 .

[49]  P. Perron,et al.  Computation and Analysis of Multiple Structural-Change Models , 1998 .

[50]  Ali M. Kutan,et al.  Nominal and real stochastic convergence of transition economies , 2004 .

[51]  A. Dixit,et al.  Monetary-Fiscal Policy Interactions and Commitment Versus Discretion in a Monetary Union , 2001 .

[52]  J. Fidrmuc,et al.  Meta-Analysis of the Business Cycle Correlation between the Euro Area and the Ceecs , 2006, SSRN Electronic Journal.

[53]  Modeling transformation in CEECs using smooth transitions , 2007 .

[54]  P. Lane.  Global Bond Portfolios and Emu , 2005, SSRN Electronic Journal.

[55]  Mark Aguiar,et al.  Emerging Market Business Cycles: The Cycle Is the Trend , 2004, Journal of Political Economy.

[56]  Nauro F. Campos,et al.  Article 2 , 2019, European Financial Services Law.

[57]  M. Ferre.  Fiscal policy coordination in the EMU , 2008 .

[58]  P. Lane,et al.  The Real Effects of European Monetary Union , 2006 .

[59]  T. Başar,et al.  A New Approach to Linear Filtering and Prediction Problems , 2001 .

[60]  Macroeconomic Convergence in Transition Countries , 2001 .

[61]  Michael J. Artis,et al.  International Business Cycles and the ERM: Is there a European Business Cycle? , 1997 .

[62]  Fariborz Moshirian,et al.  Dynamic Stock Market Integration Driven by the European Monetary Union: An Empirical Analysis , 2005 .

[63]  G. Tavlas,et al.  An Optimum Currency Area Odyssey , 2009, SSRN Electronic Journal.

[64]  Z. Darvas,et al.  Business Cycle Sychronization in the Enlarged EU , 2005 .

[65]  M. Pesaran,et al.  Supply, Demand and Monetary Policy Shocks in a Multi-Country New Keynesian Model , 2010, SSRN Electronic Journal.

[66]  Z. Darvas,et al.  Business Cycle Synchronization in the Enlarged EU , 2008 .

[67]  M. Marcellino,et al.  Characterising the Business Cycle for Accession Countries , 2004 .

[68]  J. de Haan,et al.  Is There Really a European Business Cycle? , 2000, SSRN Electronic Journal.

[69]  Martin Carree,et al.  Testing the Convergence Hypothesis: A Comment , 1997, Review of Economics and Statistics.

[70]  P. Perron,et al.  Estimating and testing linear models with multiple structural changes , 1995 .

[71]  M. Artis,et al.  Further evidence on the international business cycle and the ERM: is there a European business cycle? , 1999 .

[72]  A. H. Hallett,et al.  Measuring the Degree of Convergence among European Business Cycles , 2006 .

[73]  J. Imbs.  The Real Effects of Financial Integration , 2006 .

[74]  Jean Imbs.  Trade, Finance, Specialization and Synchronization , 2003 .

[75]  A. Sibert.  Government finance in a common currency area , 1992 .

[76]  Kurt Annen,et al.  HP-Filter Excel Add-In , 2006 .

[77]  Anil K. Bera,et al.  A test for normality of observations and regression residuals , 1987 .

[78]  W. Fuller,et al.  Distribution of the Estimators for Autoregressive Time Series with a Unit Root , 1979 .

[79]  Christophe Croux,et al.  A Measure of Comovement for Economic Variables: Theory and Empirics , 1999, Review of Economics and Statistics.

[80]  F. Mongelli.  'New' Views on the Optimum Currency Area Theory: What is Emu Telling Us? , 2002, SSRN Electronic Journal.

[81]  E. Kočenda.  Limited Macroeconomic Convergence in Transition Countries , 1999 .

[82]  J. Zidek,et al.  ON SEGMENTED MULTIVARIATE REGRESSION , 1997 .

[83]  S. Koopman,et al.  Measuring Synchronization and Convergence of Business Cycles for the Euro Area, UK and US , 2007 .

[84]  J. Peydró,et al.  Financial Integration and Business Cycle Synchronization , 2009 .

[85]  Andrew Harvey,et al.  Forecasting, Structural Time Series Models and the Kalman Filter , 1990 .

[86]  Jordi Galí,et al.  Optimal Monetary and Fiscal Policy in a Currency Union , 2005 .

[87]  Pedro J. Perez,et al.  Business cycle affiliations in the context of European integration , 2007 .

[88]  G. Peersman.  What Caused the Early Millennium Slowdown? Evidence Based on Vector Autoregressions , 2003 .

[89]  Maria Joana Soares,et al.  Business Cycle Synchronization and the Euro: a Wavelet Analysis ∗ , 2011 .

[90]  António Rua,et al.  Measuring comovement in the time-frequency space , 2010 .

[91]  A. Harvey,et al.  Detrending, stylized facts and the business cycle , 1993 .

[92]  P. Grauwe,et al.  Endogeneities of optimal currency areas , 2004 .

[93]  Evi Pappa.  The Unbearable Tightness of Being in a Monetary Union: Fiscal Restrictions and Regional Stability , 2004 .

[94]  Jon Faust,et al.  When Do Long-Run Identifying Restrictions Give Reliable Results? , 1997 .

[95]  A. Fatás,et al.  On Constraining Fiscal Policy Discretion in EMU , 2003 .

[96]  A. Pagan,et al.  SOME ISSUES IN USING VARS FOR MACROECONOMETRIC RESEARCH , 2005 .

[97]  Marek Jarocinski,et al.  Responses to Monetary Policy Shocks in the East and the West of Europe: A Comparison , 2008 .

[98]  Frank R. Lichtenberg,et al.  Testing the Convergence Hypothesis , 1994 .

[99]  Christian Zimmermann,et al.  HP-Filter (web interface) , 2005 .

[100]  Alaa M. Soliman,et al.  THE ASYMMETRIC EFFECTS OF A COMMON MONETARY POLICY IN EUROPE , 2009 .

[101]  Christian Zimmermann,et al.  HP-Filter code (Perl) , 2005 .

[102]  J. Fidrmuc,et al.  Similarity of Supply and Demand Shocks Between the Euro Area and the CEECs , 2001 .

[103]  T. Padoa-Schioppa.  The Euro Goes East , 2003 .

[104]  Kurt Annen,et al.  HP-filter for Java , 2004 .

[105]  R. Mckinnon.  Mundell, the Euro, and the World Dollar Standard , 2000 .

[106]  J. Angus.  Forecasting, Structural Time Series and the Kalman Filter , 1992 .

[107]  Federico Ravenna.  WHY JOIN A CURRENCY UNION? A NOTE ON THE IMPACT OF BELIEFS ON THE CHOICE OF MONETARY POLICY , 2011, Macroeconomic Dynamics.

[108]  Laura Mayoral.  The Persistence of Inflation in OECD Countries: A Fractionally Integrated Approach , 2005 .

[109]  A. Dixit,et al.  Symbiosis of Monetary and Fiscal Policies in a Monetary Union , 1999 .

[110]  M. Massmann,et al.  Reconsidering the evidence: are Eurozone business cycles converging? , 2004 .

[111]  Edward C. Prescott,et al.  Great Depressions of the Twentieth Century , 2007 .

[112]  C. Nerlich,et al.  How is Real Convergence Driving Nominal Convergence in the New EU Member States? , 2007, SSRN Electronic Journal.

[113]  M. Kawai.  Optimum Currency Areas , 1991 .

[114]  R. Baldwin,et al.  The Euro's Trade Effects , 2006, SSRN Electronic Journal.

[115]  I. Mihov,et al.  Fiscal Policy and EMU: Challenges of the Early Years , 2002 .

[116]  G. Box,et al.  On a measure of lack of fit in time series models , 1978 .

[117]  Adrian Pagan,et al.  Dissecting the cycle: a methodological investigation , 2002 .

[118]  Olivier J. Blanchard,et al.  Current Account Deficits in the Euro Area. The End of the Feldstein Horioka Puzzle? , 2002 .

[119]  M. Artis,et al.  Is There a European Business Cycle? , 2003, SSRN Electronic Journal.

[120]  Marta Gómez-Puig,et al.  EMU and European Government Bond Market Integration , 2009, SSRN Electronic Journal.

[121]  J. Hagen,et al.  The political economy of policy coordination in the EMU , 2001 .

[122]  Benoit Mojon,et al.  Some Stylized Facts About the Euro Area Business Cycle , 2001 .

[123]  R. E. Kalman,et al.  A New Approach to Linear Filtering and Prediction Problems , 2002 .

[124]  Kurt Annen,et al.  Matlab functions for HP-filter , 2004 .

[125]  E. Prescott,et al.  Postwar U.S. Business Cycles: An Empirical Investigation , 1997 .

[126]  Ali M. Kutan,et al.  Real and nominal stochastic convergence: Are the new EU members ready to join the Euro zone? , 2005 .

[127]  Richard Paap,et al.  The Trade and FDI Effects of EMU Enlargement , 2007, SSRN Electronic Journal.

[128]  A. Sapir,et al.  EMU and Economic Policy in Europe , 2002 .