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Business Cycle Synchronisation in EMU: Can Fiscal Policy Bring Member-Countries Closer?

Degiannakis, Stavros and Duffy, David and Filis, George and Livada, Alexandra (2014): Business Cycle Synchronisation in EMU: Can Fiscal Policy Bring Member-Countries Closer? Forthcoming in: Economic Modelling

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Abstract

The paper investigates the effects of fiscal policy on the time-varying business cycle synchronisation between the EMU12 member-countries and the aggregate EMU12-wide business cycle. The impact of fiscal policy on the level of synchronisation is estimated from the difference between the time-varying correlation of each country's business cycle and the aggregate EMU12 business cycle, before and after the effects of fiscal policy on the business cycle are accounted for. The findings suggest that fiscal policy has important effects on business cycle synchronisation for all EMU12 countries. Hence, fiscal policy is shown to have the potential to be supportive of macroeconomic stabilisation in the Eurozone. However the evidence reveals that none of the countries under examination consistently use fiscal policy to promote business cycle synchronisation.

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