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Has the Euro Changed Business Cycle Synchronization? Evidence from the Core and the Periphery

Listed author(s):
  • Sybille Lehwald

Using a Bayesian dynamic factor model, I examine the comovement of output, investment and consumption growth among Euro area countries before and after the introduction of the Euro. For that purpose, I compare a pre-Euro period (1991–1998) to a Euro period (2000–2010) and identify a common Euro factor for each period separately. I find that the comovement of main macroeconomic variables and the common factor increases for core Eurozone countries from the first to the second period, while it decreases for most peripheral economies. This can be interpreted as a rise in business cycle synchronization for the core and a respective decline for the periphery. Different to the implications made by the endogeneity argument of currency areas (Frankel and Rose, 1998), my evidence suggest that the introduction of the Euro has fostered imbalances between core and peripheral Eurozone countries.

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Paper provided by ifo Institute - Leibniz Institute for Economic Research at the University of Munich in its series ifo Working Paper Series with number 122.

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Date of creation: 2012
Handle: RePEc:ces:ifowps:_122
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