Assessing European business cycles synchronization

Kovačić, Zlatko and Vilotić, Miloš (2017): Assessing European business cycles synchronization.

Abstract

Objectives: We analyzed the level of economic integration in Europe by analyzing the degree of growth cycle synchronization between 36 countries and its evolution over the past 17 years. Information whether the business cycles in a currency union are synchronized or not is of key importance for policymakers, because lack of synchronization will lead to sub-optimal common monetary policy. The article has three objectives: extend the literature on the business cycles synchronization by using dataset that includes countries that have never been analyzed before, test the robustness of the results to extraction and synchronization measures used and propose new method for assessing evolution of the synchronization over time.

Data/methods: Quarterly GDP series from Eurostat database covering period 2000q1-2016q3 were used with two exceptions (industrial productions indexes for Bosnia and Herzegovina and Montenegro). Series were prepared by removing seasonal component using X13-ARIMA procedure. To assess robustness of synchronization tests results to alternative methods of detrending, business cycles were extracted using two filters: Corbae-Ouliaris ideal band filter and double Hodrick-Prescott filter. For assessing synchronization of the business cycles two methods were used: concordance index and cross-correlation function. Rolling cross-correlations at three lags were used to assess evolution of synchronization over time.

Conclusions: Both concordance index and cross-correlations indicated that business cycles of most old EU members are synchronized with EU cycle. However, rolling cross-correlations suggested that this synchronization decreased after 2012. Majority of new EU members cycles were weakly or not at all synchronized with EU cycle until 2004/5. After 2004 most of them were synchronized in the same quarter but with greater variations between countries. For most of them after 2010/12 the degree of synchronization dropped significantly. These results are quite robust across the cycles extraction and synchronization measures used.

• Item Type: MPRA Paper
• Language: English
• Keywords: Business cycles, European Union, synchronization, HP filter, FD filter, concordance index, cross-correlations, rolling cross-correlations
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O57 - Comparative Studies of Countries

References

Agénor, P-R., McDermott, C. J., and Prasad, E. S. (2000) “Macroeconomic fluctuations in developing countries: Some stylized facts”, The World Bank Economic Review, 14(2):251-285.

Aguiar-Conraria, L., and Soares, M. J. (2011) “Business cycle synchronization and the Euro: A wavelet analysis”, Journal of Macroeconomics, 33(3):477-489.

Akar, C. (2016) “Analyzing the synchronization between the financial and business cycles in Turkey”, Journal of Reviews on Global Economics, 5:25-35.

Artis, M., Chouliarakis, G., and Harischandra, P. K. G. (2011) “Business cycle synchronization since 1880”, The Manchester School, 79(2):173-207.

Benčík, M. (2011) “Business cycle synchronisation between the V4 countries and the euro area”, NBS Working Paper, 1/2011.

Bergman, U. M., and Jonung, L. (2011) “Business cycle synchronization in Europe: Evidence from the Scandinavian Currency Union”, The Manchester School, 79(2):268–292.

Corbae, D., & Ouliaris, S. (2006) “Extracting cycles from a non-stationary da-ta”, in P. C. B. Phillips, D. Corbae, S. N. Durlauf, and B. E. Hansen (Eds.), Econometric Theory and Practice: Frontiers of Analysis and Applied Research, pp. 167-177, Cambridge, UK: Cambridge University Press.

Dimitru, I., and Dimitru, I. (2010) “Business cycle correlation of the new member states with Eurozone - The case of Romania”, Romanian Journal of Economic Forecasting, 4:16-31.

Filis, G., Floros, C., Leon, C., and Beneki, C. (2010) “Are EU and Bulgarian business cycles synchronized?”, Journal of Money, Investment and Banking, 14: 36-45.

Gouveia, S. (2014) “ Business cycle correlation between the Euro area and the Balkan countries”, International Journal of Economic Sciences and Applied Research, 7, 33-49.

Grigoraş, V., and Stanciu, I. E. (2016) “New evidence on the (de)synchronisation of business cycles: Reshaping the European business cy-cle”, International Economics, 47:27-52.

Harding, D., and Pagan, A. (2002) “Dissecting the cycle: A methodological investigation”, Journal of Monetary Economics, 49:365–381.

Harding, D., and Pagan, A. (2006) “Synchronization of cycles”, Journal of Econometrics, 132:59-79.

Hodrick, R., and Prescott, E. C. (1997) “Postwar business cycles: an empirical investigation”, Journal of Money, Credit and Banking, 29:1-16.

Kolasa, M. (2013) “Business cycles in EU new member states: How and why are they different?”, Journal of Macroeconomics, 38:487–496.

Konstantakopoulou, I., and Tsionas, E. G. (2014) “Half a century of empirical evidence of business cycles in OECD countries”, Journal of Policy Modeling, 36:389–409.

Massmann, M., and Mitchell, J. (2004) “Reconsidering the evidence: are Euro area business cycles converging?”, Journal of Business Cycle Measurement and Analysis, 1(3):275–307.

Massmann, M., Mitchell, J., and Weale, M. (2003) “Business cycles and turn-ing points: A survey of statistical techniques”, National Institute Economic Review, (183):90-106.

Mink, M., Jacobs, J. P. A. M., and de Haan, J. (2011) “Measuring coherence of output gaps with an application to the Euro area”, Oxford Economic Papers, 64(2):217-236.

Obradović, S., and Mihajlović, V. (2013) “Synchronization of business cycles in the selected European countries”, Panoeconomicus, 6:759-773.

Papageorgiou, T., Michaelides, P. G., and Milios, J. G. (2010) “Business cycles synchronization and clustering in Europe (1960–2009)”, Journal of Economics and Business, 62:419–470.

Phillips, P. C. B., and Hin, S. (2015) “Business cycles, trend elimination, and the HP filter”, Cowles Discussion Paper No. 2005, Yale University.

Rand, J., and Tarp, F. (2002) “Business cycles in developing countries: Are they different?”, World Development, 30(12):2071-2088.

Šergo, Z., Poropat, A., and Gržinić, J. (2012) “Business cycle synchronization in Croatia”, South East European Journal of Economics and Business, 7:29-41.