Trade intensity and output synchronisation: On the endogeneity properties of EMU

Abstract

Using annual bilateral data over the period 1988-2011 for a panel of 24 industrialised and emerging economies, we analyse in a time-varying framework the determinants of output synchronisation in EMU (European Monetary Union) distinguishing between core and peripheral member states. The results support the specialisation paradigm rather than the endogeneity hypothesis. Evidence is found in the euro period of diverging patterns between the core and the peripheral EMU countries raising questions about the future stability of EMU. JEL Classifications: F10, F15, F17, F4

Endogeneity Analysis of Output Synchronization in the Current and Prospective EMU

“…This also seems consistent with findings in the literature, including, notably, Caporale et al . (). Therefore, periphery countries may have become more exposed to rather different industry shocks and isolated from common demand spillovers affecting those involved in European production networks.…”

“…The increase in time-series data availability and advances in measurement have increased the scope for empirical research using time-varying measures of synchronicity, including, most popularly, those based on amplitude (Giannone and Reichlin, 2010;Kalemli-Ozcan et al, 2013a, 2013bCaporale et al, 2015). Mink et al (2012) note, for instance, that perfect correlation of cycles does not mean that the common monetary policy suits all countries equally well if amplitude of cycles differs (see their Figure 3, p. 222).…”

“…Over recent years, studies have highlighted the growing divergence of business cycles between core and periphery EMU countries (Schmitz and Von Hagen, 2011;Vieira and Vieira, 2012;Chen et al, 2013;Caporale et al, 2015). The instabilities arising appear to stem partly from a lack of trade gains realized since the euro's introduction, especially for southern European countries, whose exports have been displaced by more competitive producers, adding to trade and financial imbalances (Chen et al, 2013).…”

“…Trade's inability to synchronize core-periphery business cycles has also been highlighted, along with an apparent reinforcement of a 'core' cycle around the euro's introduction (Caporale et al, 2015). Moreover, the trade-synchronization relationship is theoretically ambiguous, since it depends on various factors, including economic structure, the type of trade (e.g.…”

“…Various studies conclude that growing business cycle asymmetries and imbalances arising since the euro's introduction may make the sort of financial crises experienced recently more likely in the future (Schmitz and von Hagen, 2011;Vieira and Vieira, 2012;Chen et al, 2013;Caporale et al, 2015). Given that the recent euro crises involved periphery countries, prospective membership of the euro area has important implications for future regional stability and beyond.…”