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Common Trends and Cycles in European Industrial Production: Exchange Rate Regimes and Economic Convergence

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  • Mills, Terence C
  • Holmes, Mark J

Abstract

We analyse monthly data on six European industrial production series to ascertain the presence of common cycles and trends. Particular attention is paid to the exchange rate regime, with the Bretton Woods and Exchange Rate Mechanism (ERM) regimes being analysed separately. We employ recently developed techniques in vector autoregressive (VAR) modelling (a) to test for and estimate both common trends and common cycles, (b) to estimate VAR models subject to these 'common feature' restrictions, (c) to compare and contrast these models with those obtained from an alternative approach, that of estimating unrestricted levels VAR models, and (d) to present a permanent-transitory decomposition of the series that is based on the common trends found in the systems. We find limited evidence of convergence during the ERM, and this is of a long-run nature. In the short run, asymmetric shocks seem to have produced a divergence compared with the earlier Bretton Woods regime. There is also some evidence of German 'leadership' over Belgium, France and the Netherlands. Copyright 1999 by Blackwell Publishers Ltd and The Victoria University of Manchester

Suggested Citation

  • 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 557-587, September.
  • Handle: RePEc:bla:manchs:v:67:y:1999:i:4:p:557-87
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    Cited by:

    1. Terence D. Agbeyegbe, 2008. "On the feasibility of a monetary union in the Southern Africa Development Community," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(2), pages 150-157.
    2. Ferdinand Fichtner, 2003. "Germany and the European Business Cycle - An Analysis of Causal Relations in an International Real Business Cycle Model," IWP Discussion Paper Series 01/2003, Institute for Economic Policy, Cologne, Germany.
    3. Matthieu Lemoine, 2006. "Annex A5 : A model of the stochastic convergence between euro area business cycles," Working Papers hal-00972793, HAL.
    4. Bley, Jorg, 2009. "European stock market integration: Fact or fiction?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(5), pages 759-776, December.
    5. 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).
    6. Banik, Nilanjan & Biswas, Basudeb & Criddle, Keith R., 2009. "Optimum currency area in South Asia: A state space approach," International Review of Economics & Finance, Elsevier, vol. 18(3), pages 502-510, June.
    7. repec:spo:wpecon:info:hdl:2441/1461 is not listed on IDEAS
    8. Taufiq Choudhry, 2002. "Money-Income Relationships between Three ERM Countries," Journal of Applied Economics, Universidad del CEMA, vol. 5, pages 59-94, May.
    9. Consuelo Gámez Amián & Amalia Morales Zumaquero., 2002. "Complete or Partial Inflation Convergence in the EU?," Economic Working Papers at Centro de Estudios Andaluces E2002/09, Centro de Estudios Andaluces.
    10. Mark J. Holmes, 2005. "Is Long-Run Output Convergence Associated With International Cooperation? Some New Evidence For Selected African Countries," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 30(2), pages 67-85, December.
    11. Jorge M. L. G. Andraz & Paulo M.M. Rodrigues, 2015. "A Reappraisal of Eurozone Countries Output Differentials," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.

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