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|dc.description.abstract||The divergence of growth and inflation rates across EMU in recent years hasreignited the debate as to whether Europe is really an "optimum currency area"in which monetary union yields net benefits. But answering this question iscomplicated inter alia by the further controversy over whether economicintegration and, in particular, monetary union tend to cause convergence ordivergence of business cycles. Past studies have found convergence under theExchange Rate Mechanism (ERM) regime of the 1980s, but the final verdict on the1990s and especially on the period since the start of EMU is still pending. Severalstudies, such as Böwer and Guillemineau (2006), compute the unweightedaverage of countries' bilateral correlations and find convergence in the 1990s anddivergence 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 acountry's inflation rates are weighted by the relative size of a country's privateconsumption, one has to look at weighted GDP growth rates. Using these, we findsynchronisation, i.e. a further increase in correlation, both during the 1990s andsince the start of EMU, but only the former change is significant. These findingsare subsequently confirmed by the development of inflation dispersion over time.We infer that, unlike during the run-up to EMU, the introduction of a commonmonetary policy itself has not brought about a great reduction in business cycleheterogeneity, and synchronisation will probably be limited in the coming years aswell. This means that policy-makers at the national level need to do more toimprove their economies' flexibility, in order to make them better able to cope withthe remaining heterogeneity in output and inflation.||en_US|
|dc.publisher|||aDeutsche Bank Research |cFrankfurt a. M.||-|
|dc.relation.ispartofseries|||aResearch notes working paper series |x22||en_US|
|dc.title||Business cycle synchronisation in the euro area: Developments, determinants and implications||en_US|
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