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Reconsidering the Evidence: Are Euro Area Business Cycles Converging?

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  • Michael Massmann

    ()

  • James Mitchell

    ()

Abstract

This paper, using 40 years of monthly industrial production data, examines the relationship between the business cycles of the 12 euro area countries. Since estimates of the business cycle have been found to be sensitive to how the cycle is measured, a range of alternative measures is considered. We focus on both parametric and nonparametric univariate measures of the "classical" and "growth" cycles. We then investigate whether euro area business cycles have converged. This is based on a descriptive analysis of the distribution of bivariate correlation coefficients between the 12 countries’ business cycles. This extends previous work that has looked for convergence, in a similar manner by focusing on correlation, but has not considered the entire distribution, instead focusing on the mean correlation coefficient or particular bivariate correlation coefficients. Moreover, exploiting the panel of correlation coefficients we propose a statistical test for convergence based on estimation of a dynamic heterogeneous panel data model. Although empirical inference about individual euro area business cycles is found to be sensitive to the measure of the business cycle considered, our findings about convergence between the euro area business cycles exhibit similarities across the alternative measures of the business cycle. Interestingly, we find that there have been periods of convergence, identified by the distribution tending to unity, and periods of divergence. The most recent estimates suggest that correlation between the 12 European cycles is statistically positive, and has risen from a trough in the early 1990s. This is confirmed by the test for convergence, which indicates that, despite some volatility over the last 20 years, the long-run trend is for rising correlation between euro area business cycles.

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File URL: http://dx.doi.org/10.1787/jbcma-v2004-art16-en
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Bibliographic Info

Article provided by OECD Publishing,CIRET in its journal Journal of Business Cycle Measurement and Analysis.

Volume (Year): 2004 (2004)
Issue (Month): 3 ()
Pages: 275-307

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Handle: RePEc:oec:stdkaa:5lgv2584100r

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Related research

Keywords: Business cycles; EMU; Detrending methods; Convergence;

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Citations

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Cited by:
  1. Hideaki Hirata & M. Ayhan Kose & Chris Otrok, . "Regionalization vs. Globalization," Working Paper 164456, Harvard University OpenScholar.
  2. Fernandez, Viviana, 2006. "Does domestic cooperation lead to business-cycle convergence and financial linkages?," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 46(3), pages 369-396, July.
  3. Klaus Weyerstrass & Bas Aarle & Marcus Kappler & Atilim Seymen, 2011. "Business Cycle Synchronisation with(in) the Euro Area: in Search of a ‘Euro Effect’," Open Economies Review, Springer, Springer, vol. 22(3), pages 427-446, July.
  4. Barrett, Alan & Bergin, Adele & FitzGerald, John & Traistaru-Siedschlag, Iulia, 2006. "Economic Assessment of the Euro Area: Forecasts and Policy Analysis, Autumn Report 2006," Research Series, Economic and Social Research Institute (ESRI), Economic and Social Research Institute (ESRI), number sustat22.
  5. Caleiro, António, 2011. "Acerca da importância da sincronização do ciclo económico português no contexto europeu
    [Why and how must Portugal be synchronized with the European Union?]
    ," MPRA Paper 34993, University Library of Munich, Germany.
  6. Nenad Stanisic, 2013. "Convergence between the business cycles of Central and Eastern European countries and the Euro area," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, Baltic International Centre for Economic Policy Studies, vol. 13(1), pages 63-74, July.
  7. Ioanna Konstantakopoulou & Eftymios Tsionas & Tryphon Kollintzas, 2009. "Stylized Facts of Prices and Interest Rates over the Business Cycle," Economics Bulletin, AccessEcon, vol. 29(4), pages 2613-2627.
  8. Emilio Espino & Julian Kozlowski & Juan M. Sánchez, 2013. "Regionalization vs. globalization," Working Papers, Federal Reserve Bank of St. Louis 2013-002, Federal Reserve Bank of St. Louis.

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