Times are displayed in (UTC-05:00) Eastern Time (US & Canada)Change
EMU and business cycle synchronization
The goal of this paper is to explore the effect of the Economic and Monetary Union (EMU) on business cycle synchronization (BCS) of its member countries. The question on whether BCS increased (or not) after EMU still remains unanswered. Probably the main shortcoming of the related studies is that they merely regress correlation-based indices on measures of economic integration. Also, it remains unclear if other country-specific policies and institutions mitigated or strengthened any (de)synchronizing effects of monetary integration. This study aims to contribute to the existing research in three ways: First I introduce a novel difference in differences approach in the business cycle literature to provide causal evidence on the impact of EMU on BCS. Second, I outline a new mechanism that drives the impact of the euro aiming to search for potential non-uniform effects of the euro on sectoral output co-movement. Third, and in relation to this, I ask how do country specific policies and institutions might have amplified (or alleviated) the euro effect on BCS. Difference in differences econometric estimates demonstrate that the common currency caused a damaging effect on BCS. This finding is confirmed after accounting for a rich set of confounding variables, country and year fixed effects, pre-existing differential trends and post-treatment influences. Business cycle co-movement further deteriorated after the global financial and sovereign debt crisis. Sectoral analysis illustrates that the diverging impact of the euro was mostly driven by the services' sector. High product market regulation contributes to the divergence of business cycles.
