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

  • Matthieu Lemoine

    (OFCE)

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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Date of creation: 28 Sep 2006
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Handle: RePEc:spo:wpmain:info:hdl:2441/1461
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  1. Robert F. Engle & Sharon Kozicki, 1990. "Testing For Common Features," NBER Technical Working Papers 0091, National Bureau of Economic Research, Inc.
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  9. 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).
  10. 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.
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