@techreport{Basten2006Business,
abstract = {The divergence of growth and inflation rates across EMU in recent years has
reignited the debate as to whether Europe is really an "optimum currency area"
in which monetary union yields net benefits. But answering this question is
complicated inter alia by the further controversy over whether economic
integration and, in particular, monetary union tend to cause convergence or
divergence of business cycles. Past studies have found convergence under the
Exchange Rate Mechanism (ERM) regime of the 1980s, but the final verdict on the
1990s and especially on the period since the start of EMU is still pending. Several
studies, such as B\"{o}wer and Guillemineau (2006), compute the unweighted
average of countries' bilateral correlations and find convergence in the 1990s and
divergence since then, but this is largely caused by an outlier in Greece.
We argue that similar to the treatment of inflation in monetary policy, for which a
country's inflation rates are weighted by the relative size of a country's private
consumption, one has to look at weighted GDP growth rates. Using these, we find
synchronisation, i.e. a further increase in correlation, both during the 1990s and
since the start of EMU, but only the former change is significant. These findings
are subsequently confirmed by the development of inflation dispersion over time.
We infer that, unlike during the run-up to EMU, the introduction of a common
monetary policy itself has not brought about a great reduction in business cycle
heterogeneity, and synchronisation will probably be limited in the coming years as
well. This means that policy-makers at the national level need to do more to
improve their economies' flexibility, in order to make them better able to cope with
the remaining heterogeneity in output and inflation.},
author = {Christoph Basten},
copyright = {http://www.econstor.eu/dspace/Nutzungsbedingungen},
keywords = {330},
language = {eng},
number = {22},
title = {Business cycle synchronisation in the euro area: Developments, determinants and implications},
type = {Research notes working paper series},
url = {http://hdl.handle.net/10419/21885},
year = {2006}
}
