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Annex A5 : A model of the stochastic convergence between euro area business cycles

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  • Matthieu Lemoine

    (OFCE)

Abstract

A new non-linear parametric model, the Stochastic Cyclical Convergence Model (SCCM), is used for measuring the convergence of business cycles between euro area countries and the euro area aggregate. The model combines unobserved component models with time-varying parameter models. The convergence between the two cycles is characterised by two time-varying parameters, the phase-shift and a weight, which is related to the phase-adjusted correlation. A Kalman filter-based iterative procedure is used for the model estimation. SCCM models are applied to the GDP of euro area countries, the United Kingdom and of the euro area aggregate over the period 1963:1-2002:4. When the euro was launched, the convergence was already achieved for most of euro area countries, but Finland, Greece and Ireland had still not converged in 2002:4. The British cycle is also divergent with a lead equal to 3 quarters in 2002:4 and a weight equal to 0.6 in 2002:4. UK shocks have asynchronous asymmetric effects and this suggests that it would be delicate for the UK to join the euro area.

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Bibliographic Info

Paper provided by Sciences Po in its series Sciences Po publications with number info:hdl:2441/1461.

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Date of creation: 28 Sep 2006
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Handle: RePEc:spo:wpmain:info:hdl:2441/1461

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Related research

Keywords: convergence; synchronisation; business cycles; multivariate unobserved components models; time-varying parameter models; Kalman filter;

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References

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  1. Matthieu Lemoine, 2005. "A model of the stochastic convergence between business cycles," Documents de Travail de l'OFCE 2005-05, Observatoire Francais des Conjonctures Economiques (OFCE).
  2. Artis, Michael J & Zhang, W, 1997. "International Business Cycles and the ERM: Is There a European Business Cycle?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 2(1), pages 1-16, January.
  3. Engle, Robert F & Kozicki, Sharon, 1993. "Testing for Common Features: Reply," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(4), pages 393-95, October.
  4. Mills, Terence C & Holmes, Mark J, 1999. "Common Trends and Cycles in European Industrial Production: Exchange Rate Regimes and Economic Convergence," Manchester School, University of Manchester, vol. 67(4), pages 557-87, September.
  5. Cooley, Thomas F & Prescott, Edward C, 1976. "Estimation in the Presence of Stochastic Parameter Variation," Econometrica, Econometric Society, vol. 44(1), pages 167-84, January.
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  7. Harvey, A.C. & Trimbur, T.M., 2001. "General Model-based Filters for Extracting Cycles and Trends in Economic Time Series," Cambridge Working Papers in Economics 0113, Faculty of Economics, University of Cambridge.
  8. Robert F. Engle & João Victor Issler, 1993. "Common trends and common cycles in Latin America," Revista Brasileira de Economia, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 47(2), pages 149-176, April.
  9. Camba-Mendez, Gonzalo & Rodriguez-Palenzuela, Diego, 2003. "Assessment criteria for output gap estimates," Economic Modelling, Elsevier, vol. 20(3), pages 529-562, May.
  10. Robert F. Engle & Sharon Kozicki, 1990. "Testing For Common Features," NBER Technical Working Papers 0091, National Bureau of Economic Research, Inc.
  11. Durbin, James & Koopman, Siem Jan, 2001. "Time Series Analysis by State Space Methods," OUP Catalogue, Oxford University Press, number 9780198523543.
  12. Vahid, F & Engle, Robert F, 1993. "Common Trends and Common Cycles," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(4), pages 341-60, Oct.-Dec..
  13. Gerhard Runstler, 2004. "Modelling phase shifts among stochastic cycles," Econometrics Journal, Royal Economic Society, vol. 7(1), pages 232-248, 06.
  14. Harvey, Andrew & Ruiz, Esther & Shephard, Neil, 1994. "Multivariate Stochastic Variance Models," Review of Economic Studies, Wiley Blackwell, vol. 61(2), pages 247-64, April.
  15. Siem Jan Koopman & Joao Valle e Azevedo, 2003. "Measuring Synchronisation and Convergence of Business Cycles," Tinbergen Institute Discussion Papers 03-052/4, Tinbergen Institute.
  16. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-50, July.
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Cited by:
  1. Iulia Siedschlag, 2008. "Macroeconomic Differentials and Adjustment in the Euro Area," SUERF Studies, SUERF - The European Money and Finance Forum, number 2008/3 edited by Morten Balling.

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