How Phillips Curve Dynamics Enhance Business Cycle Synchronization Analysis in Central and Eastern Europe (Nico Petz, Thomas Zörner)

This paper analyzes business cycle synchronization and the Phillips curve (PC) relationship in Central, Eastern, and Southeastern European (CESEE) economies relative to the euro area. We find an overall increase in business cycle synchronicity, particularly among Euro adoption candidates, with notable heterogeneities during the early 2000s, the global financial crisis, and the euro crisis. Using a Kalman filter to extract business cycles and various measures of synchronicity, we show that CESEE EU countries align more closely with the euro area than non-EU countries. The unemployment-inflation relationship, analyzed with time-varying parameter (TVP) models, reveals a steepening of the Phillips curve post-COVID-19, with negative slope coefficients across all countries. We observe a growing convergence of the PC slope toward the euro area, especially in candidate countries. These results highlight the role of EU membership in fostering economic synchronization and emphasize the importance of considering time-varying dynamics in assessing economic convergence amid major shocks.