Business Cycle Synchronization in Europe: Evidence from a Dynamic Factor Model

Abstract

This paper revisits the effect of the European Economic and Monetary Union (EMU) on the extent of business cycle synchronization across its member states. A dynamic latent factor model is used to identify the 'regional' effect of the euro area on output growth and inflation dynamics across European countries. The results of variance decomposition analysis confirm that both output growth and inflation tended to be more synchronized among European countries during the run-up to the EMU, but there is no strong evidence to support the argument that the 'regional' effects prevailed after 1999.

Business Cycle Synchronization in EU: A Time‐Varying Approach

“…Similarly, Crespo-Cuaresma and Fern andez-Amador (2013) corroborates Hughes Hallett and Richter (2008) results suggesting that since the birth of the common currency divergence is observed in the European member-countries business cycles. Lee (2012Lee ( , 2013 reports similar results, as both studies show evidence that the level of synchronization for the European countries was higher in the pre-EMU period.…”

Business Cycle Synchronization in the EMU: Core vs. Periphery

“…The tumultuous period of the financial crisis and the following sovereign debt crisis brought deep economic imbalances within the EMU to the limelight (Lane, 2012 (Harding andPagan, 2002, 2006;Artis et al, 2004;Grigoraş and Stanciu, 2016), dynamic factor models (Lee, 2013;Lehwald, 2013;Kose et al, 2003), dynamic correlations (Croux et al, 2001;Fidrmuc and Korhonen, 2010), rolling coefficients (Gayer, 2007), correlation coefficients (Furceri and Karras, 2008) We focus on gross domestic product as our main indicator for business cycle movements for two reasons: it is (i) the most comprehensive measure for aggregate economic activity and (ii) the most widely used and accepted measure in the academic literature and in the general public Grigoraş and Stanciu, 2016). …”

Measuring Global Economic Interdependence: A Hierarchical Network Approach

“…The most interesting finding (see Figure ) – which involves Europe, East Asia and to some extent Eastern Europe – appears in relation to the increased cycle synchronisation in developed countries and the rapid economic growth in transition countries in Eastern Europe. This is potentially driven by the EU enlargement and Europeanisation process as the launch of the European common market in 1993 and the Monetary Union in 1999 generated a faster integration of the economic cycle in the region (as suggested among others by Lee, , ). In contrast, Africa and Latin America, which are characterised by no regional clusters (see Figure ), not only show the lowest levels of correlation, but also no advance in output integration in either region.…”