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Fiscal Divergence and Business Cycle Synchronization: Irresponsibility is Idiosyncratic

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Author Info
Zsolt Darvas
Andrew K. Rose
György Szapáry

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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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Handle: RePEc:nbr:nberwo:11580

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F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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  3. Antonio Fatás & Ilian Mihov, 2003. "The Case For Restricting Fiscal Policy Discretion," The Quarterly Journal of Economics, MIT Press, vol. 118(4), pages 1419-1447, November. [Downloadable!] (restricted)
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  4. M. Ayhan Kose & Eswar Prasad & Marco Terrones, 2003. "How Does Globalization Affect the Synchronization of Business Cycles?," IMF Working Papers 03/27, International Monetary Fund. [Downloadable!]
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  5. Adi Brender & Allan Drazen, 2004. "Political Budget Cycles in New versus Established Democracies," NBER Working Papers 10539, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Zsolt Darvas & György Szapáry, 2008. "Business Cycle Synchronization in the Enlarged EU," Open Economies Review, Springer, vol. 19(1), pages 1-19, February. [Downloadable!] (restricted)
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  7. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November. [Downloadable!] (restricted)
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  8. Lane, Philip R., 2003. "The cyclical behaviour of fiscal policy: evidence from the OECD," Journal of Public Economics, Elsevier, vol. 87(12), pages 2661-2675, December. [Downloadable!] (restricted)
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  1. Emil Stavrev, 2007. "Growth and Inflation Dispersions in EMU: Reasons, the Role of Adjustment Channels, and Policy Implications," IMF Working Papers 07/167, International Monetary Fund. [Downloadable!]
  2. Philip R. Lane, 2006. "The Real Effects of EMU," The Institute for International Integration Studies Discussion Paper Series iiisdp115, IIIS. [Downloadable!]
    Other versions:
  3. Christian Volpe Martincus & Andrea Molinari, 2007. "Regional Business Cycles and National Economic Borders: What Are the Effects of Trade in Developing Countries?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 143(1), pages 140-178, April. [Downloadable!] (restricted)
  4. Emil Stavrev, 2008. "What Explains Growth and Inflation Dispersions in EMU?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 58(1-2), pages 57-67, January. [Downloadable!]
  5. Kose, M. Ayhan & Otrok, Christopher & Prasad, Eswar, 2008. "Global Business Cycles: Convergence or Decoupling?," IZA Discussion Papers 3442, Institute for the Study of Labor (IZA). [Downloadable!]
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  6. Balázs Égert, 2007. "Real Convergence, Price Level Convergence and Inflation Differentials in Europe," Working Papers 138, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
    Other versions:
  7. Raquel Fonseca & Lise Patureau, 2008. "Divergence in Labor Market Institutions and International Business Cycles," Working Papers 562, RAND Corporation Publications Department. [Downloadable!]
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