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

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  12. Engle, Robert F & Kozicki, Sharon, 1993. "Testing for Common Features: Reply," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 11(4), pages 393-95, October.
  13. Harvey, Andrew & Ruiz, Esther & Shephard, Neil, 1994. "Multivariate Stochastic Variance Models," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 61(2), pages 247-64, April.
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  15. 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.
  16. Matthieu Lemoine, 2005. "A model of the stochastic convergence between business cycles," Documents de Travail de l'OFCE, Observatoire Francais des Conjonctures Economiques (OFCE) 2005-05, Observatoire Francais des Conjonctures Economiques (OFCE).
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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, SUERF - The European Money and Finance Forum, number 2008/3 edited by Morten Balling, July.

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