Business Cycle Synchronization

The recent turmoil in the euro area once more forces the EU authorities to reconsider the future of further monetary integration. One of the most commonly used criteria for successful monetary integration in contemporary research is business cycle synchronization (BCS). Though BCS has been vastly described at country level, not as much attention has been put on the degree of BSC at regional level. The topic is important for two main reasons. Firstly, determining the degree of BCS at regional level can help in the assessment of monetary policy effectiveness on the country level, as well as give a point of reference for evaluation of prospective costs of participation in a monetary union. Secondly, there is a theoretical dispute within the optimum currency areas literature between the ‘European Commission’ and the ‘Krugman’ view that can be resolved to a large extent trough regional analysis. In order to assess BCS in EU, Hodrick-Prescott, as well as Christiano and Fitzgerald filter to time series of real GDP for 24 countries, 82 NUTS 1, 242 NUTS 2 and 1264 NUTS 3 regions over the period between 1998 and 2010. The data was later used to create bilateral measures of BSC, which gave 276 observations on country level, 3321 on NUTS 1, 29161 on NUTS 2 and 798216 on NUTS 3 level. The results of the analysis support the ‘European Commission’ view and show very high degree of BSC within EU countries. The country level analysis also reveals that, within the EU, there is a group of countries that could form effectively working monetary union based on BCS criterion.

This paper analyzes the synchronization of business cycles between new and old EU members using various measures. The main findings are that Hungary, Poland and Slovenia have achieved high degree of synchronization for GDP, industry and exports, but not for consumption and services. The other CEECs have achieved less or no synchronization. There has been significant increase in synchronization of

It is generally recognized that countries wanting to join a monetary union should display the optimal currency area properties. One such property is the similarity of business cycles. We therefore undertook to analyze the synchronization of business cycles between the EMU and eight new EU members from Central and Eastern European countries (CEECs), for which the next step to be

Objective: The main goal of the paper is to evaluate, in a comparative manner, the degree of similarities in aggregated demand disturbances in the Visegrad Group (the Czech Republic, Hungary, Poland and Slovakia, collectively: V4) and the Eurozone economies from 1995 to 2013. Research Design & Methods: The underlying demand disturbances are extracted using the structural vector auto-regression (SVAR) model with the long-run restrictions. The identification scheme is based on the theoretical aggregate supply-aggregate demand (AS-AD) model. The obtained approximations of unobservable demand shocks are then used to infer on their correlation structures. Findings: The demand shocks among the four economies are described by the highest correlation among all chosen sub-samples. The dynamic approach revealed that the synchronization of the demand shocks in the V4 Group was stronger even when compared to the EMU core. The adjustments to the demand shocks in the V4 countries are relatively flexible and these economies converge to long-run equilibria at a fast pace. Implications & Recommendations: The V4 countries fulfil substantial criteria of an optimum currency area and could benefit from adoption of a single currency, as well as a common monetary policy. Contribution & Value Added: This comparative empirical study brings evidence on the similarities in aggregate demand shocks within the V4 and EMU countries. Article type: research paper

In this paper we provide a positive exercise on past business-cycle correlations and risk sharing in the European Union, and on the ability of insurance mechanisms and fiscal policies to smooth income fluctuations. The results suggest in particular that while some of the new Member States have well synchronized business cycles, for some of the other countries, business cycles are not yet well synchronized with the euro area’s business cycle, and risk-sharing mechanisms may not provide enough insurance against shocks. JEL Classification: E32, E42, F41, F42.

In the paper time-frequency analysis in the form of the maximal overlap discrete wavelet transform (MODWT) and its complex variant – the maximal overlap discrete Hilbert wavelet transform (MODHWT) is applied to study changing patterns of business cycle synchronization between Poland and 8 euro zone member countries (France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal and Spain). We also touch upon the endogeneity hypothesis of the optimum currency area criteria and ask about the recent changes in business cycle variability and their influence on the level of synchronization. Wavelet analysis is a very convenient way of studying business cycles as it possesses good localization properties and is highly efficient in extracting time- -varying frequency content of time series. In the paper we make use of these properties and provide a detailed characterization of the degree of business cycle synchronization among the countries under study as well as of the changing amplit...

During the past 8 years, the global economy has experienced significant disturbances. The financial and economic crisis, which had started in 2007 in the USA, turned into a financial and debt crisis in Europe. Greece is the country that experienced the adverse consequences of the crisis the most, and even today can be considered to be on the verge of collapse. The group of countries that have experienced the crisis the most is called PIGS and besides Greece contains Ireland, Italy, Portugal and Spain. Other European Union countries were able to deal with the crisis more efficiently. And finally Poland was the only country in Europe that did not experience negative growth of nominal GDP during the crisis and ever since.
The experiences of the last crisis led many economists to different conclusions about the ongoing globalization and the dangers of crisis contagion. However, this is not the only one notable conclusion that should be drawn from the crisis experience. It has shown the diversity of the economies of different countries - variation of consequences of the crisis, as well as time of recovery and used economic policy remedy used.
This problem is extremely important in the context of economic integration in Europe, especially for countries that are either members or candidates for membership in the euro area.  The participation in the monetary union dictates submission to common monetary policy and changes in exchange rate in tact with the behavior of the entire currency area. Successful implementation of common monetary policy hinges upon all currency union members being struck by the crisis roughly at the same time. Otherwise, monetary authorities have to put the interest of some member countries above others. This indicates that the future of European integration is strongly dependent on business cycle correlation. As mentioned above, the questions of appropriate determination of correlation of business activity along with the list of its incentives, both stimuli and inhibitors are of crucial importance.
Answers to these questions are the subject of this dissertation – how to measure the degree of business cycle synchronization and what is the state and impact of its determinants.
On the basis of the Optimum Currency Areas Theory and business cycle synchronization, literature review research has been conducted on the sample of 20 European Union countries over the period between 1990 and 2007. Burns and Mitchell, as well as Lucas definitions of business cycle were used to create business cycle synchronization (BCS) measures based on the results from the Baxter-King and Hodrick-Prescott filters. The next step was the construction and analysis of the BCS determinants: bilateral trade, structural similarity, correlation of fiscal and monetary policy, membership in the European Union and The Euro Area, GDP per capita distance, and the degree of BCS with the USA over the same period of time. Additional analysis has covered gravity variables: real GDP product, geographical distance, common border and cultural differences. In examination, both static and dynamic approaches have been used along with the nonparametric estimation of the impact of the determinants on business cycle synchronization. Research has been conducted from the perspective of the entire sample, the euro area and Poland. In order to obtain the most robust results possible, the Bayesian Model Averaging along with measures of Jointness has been performed on the data set.
Analysis has shown an ongoing increase in the degree of business cycle synchronization in the entire sample, in the euro area countries, as well as in Poland with the rest of the examined countries. All stimuli of BCS have been experiencing growing tendencies over the analyzed period. The results obtained give strong support to the ‘European Committee View’ and the ‘Endogeneity of Optimum Currency Area Criteria Hypothesis’. Bayesian Model Averaging has led to identification six robust determinants of business cycle synchronization, namely: correlation of monetary policy, structural similarity, membership in the European Union and The Euro Area, the degree of BCS with the USA and GDP per capita distance. More detailed analysis has also given strong support for the impact of bilateral trade and fiscal policy correlation on the degree of business cycle synchronization.

This paper analyses the degree of synchronization between the Mexican states and the US business cycles by using a growth cycle approach for the period 1997-2007. The business cycle indicators are obtained from seasonally-adjusted monthly manufacturing production. ...

Using a panel of 21 OECD countries and 40 years of annual data, we find that countries with similar government budget positions tend to have business cycles that fluctuate more closely. That is, fiscal convergence (in the form of persistently similar ratios of government surplus/deficit to GDP) is systematically associated with more synchronized business cycles. We also find evidence that

The last twenty years have brought a bulk of inconsistent results on the determinants of business cycle synchronization (BCS). Researchers have usually focused their attention on a limited set of possible determinants, not accounting for model uncertainty. For these reasons, Bayesian Model Averaging has been applied in this paper to the dataset with 43 potential determinants of BCS for the EU. There is strong evidence to claim that migration, exchange rate variability, similarity of production structures, TFP shocks, similarity in exchange rate policy, intra-industry trade, risk sharing, and capital mobility are robust determinants of BCS. Some well-established determinants such as bilateral trade, monetary policy similarity, gravity variables, and participation in a monetary union and free trade area have turned out to be fragile. The structure of trade is more important for BCS than its magnitude, as intra-industry trade and structural similarity are taking explanatory power away from the bilateral trade.

Tematem niniejszego artykułu jest podjęcie problemu niejasnych wyników badań empirycznych nad synchronizacją cykli koniunkturalnych. W tym celu przedstawiono model dwóch krajów wykorzystany do analizy synchronizacji cykli koniunkturalnych. Model dawał bardzo klarowne wskazówki odnośnie do mechanizmów transmisji szoków, jak i koniecznych zmiennych kontrol-nych na potrzeby modelu ekonometrycznego. Analiza modelowa wskazała, że wpływ kanału handlowego, aproksymowanego przez krańcową skłonnośćdo konsumpcji, ma dodatni, jednak wykazujący malejące przyrosty krańcowe, wpływ na transmisję szoku, a przez to na synchronizację cykli koniunktu-ralnych. Wynik ten został wcześniej uzyskany przez Silvestrea, Mendonça oraz Passosa (2007), a następnie potwierdzony przez autora empirycznie z wykorzystaniem metody nieparametrycznej. Analiza modelowa wskazała także, iż przy prowadzeniu badań nad synchronizacją cykli koniunkturalnych konieczna jest kontrola ze względu na symetryczność rozkładu szoków, współ-zmienność polityki fiskalnej oraz reżim kursowy. Weryfikacja empiryczna z wykorzystaniem metod parametrycznych wykazała prawdziwość tych stwier-dzeń oraz wskazała na konieczność kontroli ze względu na zignorowanąwmodelu politykę pieniężną. Tym samym, wyniki badań autora pozwalająwytłumaczyć wyniki uzyskane przez Baxter i Kouparitsasa (2004) oraz Böwer i Guillemineau (2006).