One money, one cycle? The EMU experience

Abstract

JEL classification: E02 E32 E58 F15 F33 a b s t r a c tWe examine whether the introduction of the euro had a significant impact on the synchronization of business cycles among members of Economic and Monetary Union (EMU). Empirical evidence on this relationship is rare so far and suffers from methodical weaknesses, such as the absence of time variability, which is crucial for addressing this issue. Using a synchronization index that is constructed on a year-by-year basis (1993-2011), we uncover a strong and robust empirical finding: the adoption of the euro has significantly increased the correlation of member countries' business cycles above and beyond the effect of higher trade integration. Thus, our results substantially strengthen the conclusion by Frankel and Rose (1998), i.e. a country is more likely to satisfy the criteria for entry into a currency union ex post rather than ex ante. Remarkably, however, this reasoning is even verified when controlling for the effect of increased trade linkages implied by entering a currency union.

Business Cycle Synchronization in the EMU: Core vs. Periphery

“…In the following, we introduce a correlation index developed by Cerqueira and Martins (2009) that gains increasing popularity in business cycle research (Gächter and Riedl, 2014;Bierbaumer-Polly et al, 2016). As opposed to normal correlation coefficients, the correlation index of Cerqueira and Martins (2009) provides a measure of bilateral correlation for higher -in our case quarterly -frequencies and captures time-variability in bilateral business cycle correlations since it distinguishes between specific episodes of higher and lower synchronization, respectively.…”

Wage Divergence, Business Cycle Co‐Movement and the Currency Union Effect

“… where ρ ij , t denotes the bounded correlation index outlined in equation . The index Correl ij , t exhibits a symmetric range between −∞ and +∞, and can thus be used in our regression analysis as the dependent variable (see also Gächter and Riedl, ).…”

“…Several factors have been suggested to determine cyclical co‐movement. While the positive effect of bilateral trade links on BC synchronization is now firmly established (Frankel and Rose, ; Gächter and Riedl, ; Inklaar et al ., ), there is little consensus on other determinants. Darvas et al (), for instance, highlight the importance of fiscal variables such as similar budget deficits and public debt while Imbs () stresses the relevance of financial integration.…”

“…Darvas et al (), for instance, highlight the importance of fiscal variables such as similar budget deficits and public debt while Imbs () stresses the relevance of financial integration. Gächter and Riedl () show that EMU membership per se has increased BC synchronization across member countries. Yet, one factor that has been prominently discussed both in the theoretical literature and in policy circles has been disregarded in empirical studies so far: the impact of relative wage developments on BC synchronization.…”

Regional Business‐Cycle Synchronization, Sector Specialization and EU Accession

“…Equation may, however, be overly restrictive on account of the substantial persistence of business‐cycle correlations (particularly in the case of rolling windows), as well as structural differences. Gächter and Riedl () find that modelling this persistence may substantially change results of DiD tests for the effect of EMU on national business‐cycle synchronization. Furthermore, Bertrand et al .…”