Business Cycle Synchronization in Europe: Evidence from a Dynamic Factor Model

Jim Lee

39 citations0/0 files storedInternational Economic Journal

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Monetary Policy and Economic Impact Global Financial Crisis and Policies European Monetary and Fiscal Policies

Abstract

This paper revisits the effect of the European Economic and Monetary Union (EMU) on the extent of business cycle synchronization across its member states. A dynamic latent factor model is used to identify the ‘regional’ effect of the euro area on output growth and inflation dynamics across European countries. The results of variance decomposition analysis confirm that both output growth and inflation tended to be more synchronized among European countries during the run-up to the EMU, but there is no strong evidence to support the argument that the ‘regional’ effects prevailed after 1999.

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References

1991Geography and Trade 1961A Theory of Optimum Currency Areas 1993Tests for Parameter Instability and Structural Change With Unknown Change Point 1998The Endogenity of the Optimum Currency Area Criteria 2000The Generalized Dynamic-Factor Model: Identification and Estimation 1993Lessons of Massachusetts for EMU 1970Monetary Problems of the International Economy.2008GLOBAL BUSINESS CYCLES: CONVERGENCE OR DECOUPLING?*

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2014Business Cycle Synchronization in EU: A Time‐Varying Approach 2019Who leads the inflation cycle in Europe? Inflation cycle and spillover influence among Eurozone and non-Eurozone economies 2019Decoupling after the Crisis: Western and Eastern Business Cycles in the European Union

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