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Has the Euro changed the business cycle?

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  • Enders, Zeno
  • Jung, Philip
  • Müller, Gernot J.

Abstract

In contrast to the notion that the exchange-rate regime is non-neutral, there is little evidence that EMU has systematically changed the European business cycle. In fact, we find the volatility of macroeconomic variables largely unchanged before and after the introduction of the Euro. Exceptions are a strong decline in real exchange rate volatility and a considerable increase in cross-country correlations. To account for this finding, we develop a two-country business cycle model which is able to replicate key features of European data. In particular, the model correctly predicts a limited effect of EMU on standard business cycles statistics. However, further analysis reveals that the Euro has changed the nature of the cycle through its impact on the transmission mechanism. Cross-country spillovers have become relatively more, domestic shocks relatively less important in accounting for economic fluctuations under EMU. This explains why there is little change in unconditional volatilities.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 59 (2013)
Issue (Month): C ()
Pages: 189-211

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Handle: RePEc:eee:eecrev:v:59:y:2013:i:c:p:189-211

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Web page: http://www.elsevier.com/locate/eer

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Keywords: European business cycles; Euro; Optimum currency area; EMU; Monetary policy; Exchange rate regime; Cross-country spillovers;

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Citations

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Cited by:
  1. Enders, Zeno & Müller, Gernot J. & Scholl, Almuth, 2011. "How do fiscal and technology shocks affect real exchange rates?: New evidence for the United States," Journal of International Economics, Elsevier, Elsevier, vol. 83(1), pages 53-69, January.
  2. J. James Reade & Ulrich Volz, 2009. "Too Much to Lose, or More to Gain? Should Sweden Join the Euro?," Economics Series Working Papers 442, University of Oxford, Department of Economics.
  3. Stefan Niemann & Paul Pichler, 2013. "Collateral, liquidity and debt sustainability," Economics Discussion Papers, University of Essex, Department of Economics 730, University of Essex, Department of Economics.
  4. Fidrmuc, Jarko & Hake, Mariya & Stix, Helmut, 2013. "Households’ foreign currency borrowing in Central and Eastern Europe," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(6), pages 1880-1897.
  5. Amisano, Gianni & Giammarioli, Nicola & Stracca, Livio, 2009. "EMU and the adjustment to asymmetric shocks: the case of Italy," Working Paper Series, European Central Bank 1128, European Central Bank.
  6. Matthieu Bussiere & Alexander Chudik & Arnaud Mehl, 2011. "How have global shocks impacted the real effective exchange rates of individual Euro area countries since the Euro's creation?," Globalization and Monetary Policy Institute Working Paper 102, Federal Reserve Bank of Dallas.
  7. Sybille Lehwald, 2013. "Has the Euro changed business cycle synchronization? Evidence from the core and the periphery," Empirica, Springer, Springer, vol. 40(4), pages 655-684, November.
  8. Luisito Bertinelli & Olivier Cardi & Partha Sen, 2012. "Deregulation shock in product market and unemployment," CREA Discussion Paper Series 12-04, Center for Research in Economic Analysis, University of Luxembourg.
  9. Eugenia Vella & Evangelos Dioikitopoulos & Sarantis Kalyvitis, . "Green Spending Reforms, Growth and Welfare with Endogenous Subjective Discounting," DEOS Working Papers 1335, Athens University of Economics and Business.
  10. Petr Rozmahel & Ladislava Grochová & Marek Litzman, 2014. "The effect of asymmetries in fiscal policy conducts on business cycle correlation in the EU," WWWforEurope Working Papers series 62, WWWforEurope.

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