Determinants of co-movement and of lead and lag behavior of business cycles in the Eurozone

Abstract

In this paper we study business cycle correlations in the Eurozone and its determinants. Additionally, we also analyze the determinants of the lead and lag behavior of business cycles in the Eurozone. We explore the relevance, in the Eurozone context, using GDP and employment as the business cycle measures, of the determinants of business cycle synchronization identified in the literature, namely bilateral trade intensity, dissimilarity of labor market rigidity, dissimilarity in industrial structures, financial openness, and foreign direct investment relations. We estimate a simultaneous 4-equations model by Ordinary Least Squares (OLS) and three-stage least square to investigate empirically the above-mentioned determinants of business cycle correlation. Bilateral trade relations present a positive influence on business cycle correlations, while the dissimilarity of labor market rigidity presents a negative influence. The rest of the above-mentioned variables are non-significant. These results are robust to the use of the Hodrick-Prescott-filter and first differences as the de-trending methods, as well as the use of GDP as the business cycle measure, excluding the financial crisis years (2008 and 2009). Results for employment as the business cycle measure are in contrast with the previous ones, and found industrial dissimilarity to be the relevant variable to determine business cycles synchronization. In what concerns the determinants of the lead and lag behavior, results show that the member states of the Eurozone that usually lead the cycle are the ones that are wealthier, with strict employment legislation, more specialized in construction and finance sectors, and more prone to international capital movements. Differences in the determinants between contemporaneous business cycles and lead and lag behavior of business cycles are especially important for policy-makers in the Eurozone to know about, in particular if asymmetric shocks between countries are set in place.

Business cycle synchronization of a small open EU-candidate country’s economy with the EU economy

“…This result is consistent with the research of Zhang (1997, 1999), which suggests that the fixed exchange rate regime has a positive impact on business cycle synchronization by imposing economic policy discipline. Also, it is consistent with the research of Duran (2013) and Duran and Ferreira-Lopes (2015), which suggests that trade integration as well as the process of nominal and real convergence are positively associated with business cycle synchronization.…”

Vulnerability of Ancient Dry-joint Masonry Towers

“…It has been adapted to different disciplines. Regression analysis is used in different research areas such as the economy (Anghelache and Anghel, 2014;Busu, 2019;Dimian, 2014;Duran and Ferreira-Lopes, 2016;Duran, 2017;Uysal and Aydemir, 2016), medicine (Başgelmez and Yıldız, 2017;Conrad et al, 2010;Kaier et al, 2010;Onder and Batigun, 2016;Pervaiz et al, 2017), educational sciences (Pedhazur, 1997;Radhy, 2019;Ünal et al, 2017;Wang et al, 2011;Yavuz et al, 2017), agriculture (Kelechi, 2012;Kuethe and Borchers, 2012) and engineering (Carpino et al, 2017;Chen et al, 2011;Kanıt and Baykan, 2020).…”

Real and Financial Asymmetries in the Euro Area

“… also find that EA business cycles have de-synchronised since the most recent financial crisis, andDuran and Ferreira-Lopes (2017) show that the mean correlation increased until 2008 and fell thereafter.Van Beers et al (2014) find a strong convergence effect in the euro period until the onset of the financial crisis. They conclude that synchronisation among EA countries decreased since the start of the crisis but is still larger than before the euro's introduction.…”

“…The most prominent measure of economic activity used in business cycle studies is quarterly real GDP . Other measures of economic activity include the industrial production index at the monthly frequency Gayer, 2007;Massmann and Mitchell, 2005) and unemployment or employment (Duran and Ferreira-Lopes, 2016) at the quarterly frequency. The Hodrick-Prescott filter is generally applied to extract the business cycle Duran and Ferreira-Lopes, 2016;Massmann and Mitchell, 2005;Weyerstrass et al, 2011).…”

“…Other measures of economic activity include the industrial production index at the monthly frequency Gayer, 2007;Massmann and Mitchell, 2005) and unemployment or employment (Duran and Ferreira-Lopes, 2016) at the quarterly frequency. The Hodrick-Prescott filter is generally applied to extract the business cycle Duran and Ferreira-Lopes, 2016;Massmann and Mitchell, 2005;Weyerstrass et al, 2011). Some papers use the Baxter-King bandpass filter Gouveia and Correia, 2008;Massmann and Mitchell, 2005;Weyerstrass et al, 2011) or the Christiano-Fitzgerald bandpass filter Weyerstrass et al, 2011).…”