Measuring business cycle comovements in Europe: Evidence from a dynamic factor model with time-varying parameters

Estimation results from a dynamic factor model confirm an increase in output synchronization across European countries during the run-up to the inception of EMU, but EMU by itself has not continued to foster the emergence of a common business cycle.     

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

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 Comovement and Labor Market Institutions: An Empirical Investigation

This paper examines the empirical link between labor market institutions and international business cycle synchronization. Using a data panel of 20 OECD countries over the 1964–2003 period, we evaluate how cross‐country labor market heterogeneity affects business cycle comovement. Our estimation strategy controls for a large set of possible factors influencing cross‐country GDP correlation, which allows a comparison of our results with those found in previous studies. We find that bilateral trade, trade similarity, monetary and fiscal convergence, as well as EMU membership lead to more synchronized cycles. Our results show that labor market regulations affect the extent of business cycle synchronization. Disparities in employment protection laws and direct taxation tend to lower international comovement while divergence in union density, unemployment benefits, and indirect taxation enhance cross‐country correlations. The level of labor market regulations also matters. Heavier employment taxes are found to raise GDP comovement.     

Has the Euro changed business cycle synchronization? Evidence from the core and the periphery

Using a Bayesian dynamic factor model, I examine the comovement of output, investment and consumption growth among Euro area countries before and after the introduction of the Euro. For that purpose, I compare a pre-Euro period (1991–1998) to a Euro period (2000–2010) and identify a common Euro factor for each period separately. I find that the comovement of main macroeconomic variables and the common factor increases for core Eurozone countries from the first to the second period, while it decreases for most peripheral economies. This can be interpreted as a rise in business cycle synchronization for the core and a respective decline for the periphery. Different to the implications made by the endogeneity argument of currency areas (Frankel and Rose in Econ J 108(449):1009–1025, 1998), my evidence suggest that the introduction of the Euro has fostered imbalances between core and peripheral Eurozone countries.     

Fiscal policy,government size and EMU business cycle synchronization

We provide new evidence on the effects of fiscal policy and government size on pairwise business cycle synchronization in EMU. A novel time-varying framework is employed to estimate business cycle synchronization and subsequently a panel approach is used to establish the role of fiscal variables in determining the pairwise synchronization observations across time. The findings suggest similarities in the size of the public sector, yet divergence in fiscal policy stance, matter for the determination of business cycle synchronization. Hence, increased fiscal federalism in EMU will contribute to increased business cycle synchronization. Our results remain robust to different specifications and sub-periods.     

Twin deficits and fiscal spillovers in the EMU's periphery. A Keynesian perspective

The objective of this paper is to shed light on the twin deficit hypothesis in Southern Europe and the MENA region, taking into account fiscal spillovers from the core during the global crisis. Using Godley and Lavoie (2007)'s baseline model, we first show that fiscal shocks from a core region could aggravate macroeconomic imbalances in the periphery. We then gather data from the period 1977–2016 for ten MENA and peripheral EMU countries, and model the twin deficit hypothesis in the presence of fiscal spillover with a P-VARX methodology. Our results highlight that fiscal balance, current account, and GDP growth rates in the EMU's periphery are negatively affected by fiscal consolidations in the core. Fiscal discipline in surplus countries is tantamount to a ‘beggar thy neighbor’ effect on the periphery, in times of crisis. We discuss the implications of our results to propose further international coordination of macroeconomic policies.     

The role of global financial conditions for credit supply in EMU periphery countries

The article analyses the role of global financial conditions for credit supply and growth performance in individual member states of the European Monetary Union (EMU). In line with the risk-taking channel of monetary policy, we find that in the short run, the Fed and European Central Bank (ECB) interest rate policy compensate for changes in global risk assessment thereby supporting net private credit flows to the European periphery. However, in later periods, a worsened risk sentiment weighs on credit flows to these countries. In contrast, EMU core countries are generally less affected by global financial shocks. This asymmetric influence of global conditions on EMU member states are smoothed by the uniform access of commercial banks to the Eurosystem’s open market operations in conjunction with the redistribution of liquidity via the TARGET mechanism.     

Business Cycle Synchronization in EU: A Time‐Varying Approach

This article investigates the time‐varying correlation between the EU12‐wide business cycle and the initial EU12 member‐countries based on Scalar‐BEKK and multivariate Riskmetrics model frameworks for the period 1980–2012. The paper provides evidence that changes in the business cycle synchronization correspond to major economic events that have taken place at a European level. In the main, business cycle synchronization until 2007 had moved in a direction positive for the operation of a single currency, suggesting that the common monetary policy was less costly in terms of lost flexibility at the national level. However, as a result of the Great Recession of 2007 and the subsequent Eurozone Crisis, a number of periphery countries, most notably Greece, have experienced desynchronization of their business cycles with the EU12‐wide cycle. Nevertheless, for most countries, any questions regarding the optimality and sustainability of the common currency area in Europe should not be attributed to a lack of cyclical synchronization.     

Business cycles and economic crisis in Greece (1960–2011): A long run equilibrium analysis in the Eurozone

Empirical studies find that fluctuations in output and other macroeconomic aggregates are positively related across countries. Economic theory focuses on two main explanations: common shocks and common transmission mechanisms. In this paper, we conduct an empirical analysis of the international influences, specifically from the U.S. and E.U. on the Greek business-cycle. First, we provide an in-depth analysis of the Greek economy, summarizing crucial aspects and trends by means of relevant econometric techniques such as business cycles extraction and periodization based on filtering, spectral analysis and causality tests. Next, we assess the long-run equilibriums of the Greek economy with the rest of the E.U. countries and the U.S. economy by means of a Vector Error Correction model. Our results imply a significant shift in the long-run equilibriums of the Greek economy towards increasing convergence rates with the U.S. economy after the implementation of the common monetary policy and increasing convergence rates towards the peripheral countries of the E.M.U. Also, the Greek GDP fluctuations are found to be caused, to a certain extent, by the EMU and US fluctuations, implying a transmission mechanism of business cycles from the EMU and the US to the Greek economy.     

Business-cycle synchronization in the EMU

This article asks whether the business cycles of the EU countries have become more or less synchronized after the introduction of the euro. Our findings show that all countries in our EU sample are better synchronized with the EMU-wide economy in the post-EMU period than they were before the euro. We also show that this increase in synchronization is present in all components of aggregate demand, as well as two supply-side variables, but it is more pronounced in the trade components (imports and, particularly, exports). It is also shown that the increase in trade within the EMU area is at least partly responsible for the increase in cyclical synchronization.     

Business cycle synchronization and the Euro: A wavelet analysis

We use wavelet analysis to study business cycle synchronization across the EU-15 and the Euro-12 countries. Based on the wavelet transform, we propose a metric to measure and test for business cycles synchronization. Several conclusions emerge. France and Germany form the core of the Euro land, being the most synchronized countries with the rest of Europe. Portugal, Greece, Ireland and Finland do not show statistically relevant degrees of synchronization with Europe. We also show that some countries (like Spain) have a French accent, while others have a German accent (e.g., Austria). Perhaps surprisingly, we find that the French business cycle has been leading the German business cycle as well as the rest of Europe. Among the countries that may, in the future, join the Euro, the Czech Republic seems the most promising candidate.     

Panel data modelling and the tax-spend controversy in the euro zone

This article attempts to differentiate between the debatable tax and spend, spend and tax, fiscal synchronization and institutional separation hypotheses in order to explore empirically the interplay between public expenditures and public revenues in the Economic and Monetary Union (EMU) member states. For this purpose, panel data models are derived to test the validity of the four hypotheses in EMU countries. A notable characteristic of this article is that the four hypotheses are tested by dividing EMU countries into various subgroups and using disaggregated data for government expenditures and revenues. Seeking for the robustness of the empirical evidence, the panel data methods of Generalized Two-Stage Least Squares (GTSLS) and Generalized Method of Moments (GMM) are accordingly applied to identify the relationship between public outlays and taxation receipts. GTSLS and GMM results strongly support the fiscal synchronization hypothesis implying that budget decision-making is significantly influenced by both government expenditures and revenues components.     

Does the Single Currency Affect Foreign Direct Investment?*

Does the creation of the euro partly explain the sharp increase in European investments? To address this question, we derive a simple gravity‐like model for bilateral foreign direct investment (FDI). Using this model, we find that the Economic and Monetary Union (EMU) has increased intra‐EMU FDI stocks on average by around 30 percent. This effect varies over time and across EMU members. It is found to be larger for the outward investments of the less‐developed EMU members. Moreover, contrary to early expectations of FDI diversion effects, EMU countries have invested more in non‐EMU countries since the launch of the euro.     

Revisiting the core-periphery view of EMU

This study extends Bayoumi and Eichengreen's (1993) empirical methodology in order to give a reappraisal of the core-periphery view of the enlarged euro area. We show how to derive two useful indices from the “correlation box” formed by aggregate demand and supply shocks. One measures the Euclidean distance to the core, while the other reveals whether shock asymmetry comes mostly from the production or the demand side. Using data over 1996–2008 on 21 countries and iterative VAR estimates, we find evidence of a gradual move to the symmetric core while new EMU Member States still remain at the very periphery.     

Synchronization and diversity in business cycles: a network analysis of the European Union

In this article, we use a correlation matrix and its internal networks to analyse business cycle synchronization across Europe since 2000. This methodology allows us to summarize individual country interactions and co-movements while also capturing the existing heterogeneity of connectivity within the European economic system. Our results indicate that synchronization of the euro zone countries remained stable from 1999 until the current financial crisis, after which co-movements increased sharply and synchronization rose to the highest in the time sample. By endogenously identifying clusters of countries with close connections in their business cycle, we also refute the commonly accepted notion of identifiable core and peripheral euro zone countries.     

Overborrowing and Balance of Payments Imbalances in a Monetary Union

The sources of the balance of payments imbalances in the Euro area can be characterized by a combination of four phenomena: (i) the credit imbalances between the core and the periphery of the Economic and Monetary Union (EMU) (ii) the credit misallocation between the tradable and the nontradable sectors in the periphery (iii) the rapid increase in the output and the price of nontradable goods in the periphery since the beginning of the EMU and (iv) the current account imbalances within the EMU. This paper explains all four of these stylized facts within a single model as a result of the interaction between the common monetary policy, inflation heterogeneity and a relaxation of the credit constraint in the nontradable sector of the periphery. When nontradable goods are used as collateral, an increase in their prices can initiate an overborrowing spiral and lead to a balance of payment imbalances. Furthermore, the model endogenizes differences in unit labor costs between the core and the periphery of the Euro area.     

Business cycle affiliations in the context of European integration

We study affiliations for the countries of the European Economic and Monetary Union (EMU) with Germany and the USA, using various business cycle measures derived from quarterly real GDP. These measures are Hodrick-Prescott and Baxter-King filtered series and annual growth rates. By using rolling contemporaneous and maximum (over a short lead/lag interval) correlations, we document increasing correlations of EMU countries with Germany, with these typically being largest during the 1990s. We also document a strong leading role for the USA in relation to these countries in the period since 1993, thereby correcting the fallacy that the European business cycle was disjointed from the USA for most of the 1990s.     

INTERNATIONAL CAPITAL FLOWS,BOOM‐BUST CYCLES,AND BUSINESS CYCLE SYNCHRONIZATION IN THE ASIA PACIFIC REGION

This article documents evidence of business cycle synchronization in selected Asia Pacific countries since the 1990s. We explain business cycle synchronization by the channel of international capital flows and boom‐bust cycles. Using the vector auto‐regression method, we find that most Asian countries experience boom‐bust cycles following capital inflows, where the boom in output is mostly driven by consumption and investment. Empirical evidence also shows that capital flow shocks are positively correlated in the region, which supports the conclusion that capital market liberalization has contributed to business cycle synchronization. (JEL F4)     

Coordination versus flexibility in wage formation: a focus on the nominal wage impact of productivity in Germany,Greece, Ireland,Portugal, Spain and the United States

Wage coordination between countries of the European Monetary Union (EMU) aims at aligning nominal wage growth with labour productivity growth at the national level. We analyse the developments in Germany, the EMU’s periphery countries Greece, Ireland, Portugal and Spain along with the United States over the period 1980 to 2010. Apart from the contribution of productivity to nominal wages, we take into account the contributions of prices, unemployment, replacement rates and taxes by means of an econometrically estimated nonlinear equation resulting from a wage bargaining model. We further study the downward rigidities of nominal wages. The findings show that in past times of low productivity, price inflation and reductions in unemployment still put significant upward pressure on nominal wage growth. The periphery countries are far from aligning nominal wage growth with productivity growth. German productivity is a major wage determinant, but surely not the only one. Within the context of a free bargaining process between employers and labour unions, policy-makers can effectively use the replacement rate to steer the nominal wages outcome.     

Trade imbalances within the euro area and with respect to the rest of the world

Many studies have explored the determinants of current account balances in Europe. However, only in a few studies has trade balance been decomposed into intra balance, trade balance vis-à-vis the euro area, and extra balance, trade balance vis-à-vis the rest of the world. This decomposition is necessary for us to understand why some core euro area countries are acting as financial intermediaries for the periphery countries. Furthermore, the determinants of intra and extra balances might be different because nominal exchange rate cannot adjust between the EMU countries while their financial markets are highly integrated. Thus, we apply this decomposition and supplement the previous studies by including a larger set of theoretically plausible explanatory variables, which is derived from the current account literature. Our contribution is twofold: We observe that, contrary to Schmitz and von Hagen (2011), the introduction of a common currency has not increased the elasticity of net capital flows to per capita incomes within the euro area for the member countries. On the other hand, there is a great heterogeneity among the usual determinants of trade balances whether those contribute to intra balances or extra balances. These results increase our understanding of the imbalances in the euro area.