Do the Economic Cycles of the Eurozone Member States converge? Empirical Evidence.

Escañuela Romana, Ignacio (2013): Do the Economic Cycles of the Eurozone Member States converge? Empirical Evidence.

Abstract

Scientific literature maintains by consensus that the Eurozone countries did not have the conditions required for an optimal currency area, at the time of acquiring the common currency. However, the endogeneity of such conditions is under debate. Can the conditions for optimal currency union contribute towards creating the elements necessary for this area? If the answer is negative, some member states have costs higher than the benefits produced through membership of the monetary area. As a result, the survival of this common currency will be at serious risk. This paper attempts to measure the variable considered essential by the literature: the convergence or synchronization between national economic cycles, from the adoption of the Euro in 1999. This synchronization would avoid the asymmetric shocks. Shocks that have different economic consequences on the member states of the Euro, making an optimal common monetary policy impossible for all states. I have employed three different methods in order to get a robust empirical measurement. My conclusion is that there is no robust empirical evidence about the synchronization of national economic cycles in the Eurozone. Moreover, there is no evidence of the growth of this convergence. Therefore, it must be impossible to set up a monetary policy capable of facing the movements that separate national cycles. They generate Euro membership costs that could be excessive.

• Item Type: MPRA Paper
• Language: English
• Keywords: Monetary Areas, Economic Cycles
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C10 - General; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems ; Standards ; Regimes ; Government and the Monetary System ; Payment Systems

References

Cancelo, J. R. (2012), “Cyclical synchronization in the EMU along the financial crisis: An interpretation of the conflicting signals”, European Journal of Government and Economics, Vol. 1, No. 1.

De Haan, J., Mink y M., Jacobs (2007), “Measuring Synchronicity and Co-movement of Business Cycles with an Application to the Euro Area”, CESIFO Working Paper 2112.

Gächter, M., Riedl, A. y Riczberger-Grünwald, D. (2012), “Business Cycle Synchronization in the Euro Area and the Impact of the Financial Crisis”, Monetary Policy and the Economy Q2/12.

Mundell, R. A. (1961), “A Theory of Optimum Currency Areas”, The American Economic Review, Vol. 51, No. 4., pp. 509-517.