Business and Financial Cycles in the Eurozone: Synchronization or Decoupling

Research output: Contribution to journalArticlepeer-review

Authors

External organisations

  • State Bank of Pakistan, Karachi, Pakistan
  • School of Business and Economics, Maastricht University, The Netherlands

Abstract

This paper proposes a novel approach, based on probit framework, towards measuring bilateral synchronization, separately within business cycles and within financial cycles, for eleven eurozone economies. We find strong cross-country synchronization both within real cycles and within financial cycles. Moreover, financial cycle synchronization dominates business cycle synchronization in
the eurozone, especially after the introduction of the single currency. For some peripheral country pairs, we even find some evidence of "de-coupling" of business cycles relative to the core countries but majority of marginal business cycle effects do not change much before and after the common currency. The former observation supports the plea for more Europe-wide macro-prudential regulation whereas the latter observation gives ammunition to those economists who always stress that the euro zone architecture is an unfinished business and that the conditions for an optimum
currency area are not fulfilled.

Details

Original languageEnglish
Number of pages37
JournalManchester School
Early online date2 Apr 2017
Publication statusE-pub ahead of print - 2 Apr 2017