Business and Financial Cycles in the Eurozone: Synchronization or Decoupling

Jameel Ahmed, Sajid M. Chaudhry and Stefan Straetmans

Manchester School, 2018, vol. 86, issue 3, 358-389

Abstract: This paper proposes a novel approach, based on probit framework, toward measuring bilateral synchronization, separately within business cycles and within financial cycles, for 11 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 ‘decoupling’ 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.

Date: 2018
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