Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/83588
Authors: 
Darvas, Zsolt
Rose, Andrew K.
Szapáry, György
Year of Publication: 
2005
Series/Report no.: 
MNB Working Papers 2005/3
Abstract: 
Using a panel of 21 OECD countries and 40 years of annual data, we find that countries with similar government budget positions tend to have business cycles that fluctuate more closely. That is, fiscal convergence (in the form of persistently similar ratios of government surplus/deficit to GDP) is systematically associated with more synchronized business cycles. We also find evidence that reduced fiscal deficits increase business cycle synchronization. The Maastricht “convergence criteria,” used to determine eligibility for EMU, encouraged fiscal convergence and deficit reduction. They may thus have indirectly moved Europe closer to an optimum currency area, by reducing countries’ abilities to create idiosyncratic fiscal shocks. Our empirical results are economically and statistically significant, and robust.
Subjects: 
European
monetary
union
policy
Maastricht
criteria
optimum
Mundell
JEL: 
F42
Document Type: 
Working Paper

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