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Fiscal Divergence and Business Cycle Synchronization: Irresponsibility is Idiosyncratic

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  • Zsolt Darvas
  • Andrew K. Rose
  • György Szapáry

Abstract

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 reduced fiscal deficits increase business cycle synchronization. The Maastricht %u201Cconvergence criteria,%u201D used to determine eligibility for EMU, encouraged fiscal convergence and deficit reduction. They may thus have indirectly moved Europe closer to an optimum currency area, by reducing countries%u2019 abilities to create idiosyncratic fiscal shocks. Our empirical results are economically and statistically significant, and robust.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11580.

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Date of creation: Aug 2005
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Publication status: published as Fiscal Divergence and Business Cycle Synchronization: Irresponsibility is Idiosyncratic , Zsolt Darvas, Andrew K. Rose, Gyorgy Szapary. in NBER International Seminar on Macroeconomics 2005 , Frankel and Pissarides. 2007
Handle: RePEc:nbr:nberwo:11580

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