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

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Time varying correlation, EMU business cycle, business cycle synchronisation, fiscal policy, Diag-BEKK model.
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O52 - Europe

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