Bilateral business cycle synchronisation in the EMU: What is the role of fiscal policy and government size?

Sabrina Bunyan (), David Duffy, George Filis and Ishmael Tingbani
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Sabrina Bunyan: Dep. of Accounting, Finance and Economics, Ulster University
David Duffy: Dep. of Accounting, Finance and Economics, Ulster University
Ishmael Tingbani: Dep.of Accounting, Finance and Economics, Bournemouth University

No 2018.02, Working Papers from International Network for Economic Research - INFER

Abstract: This paper investigates the effects of fiscal policy and public-sector size on the bilateral business cycle synchronisation between 14 EU countries, while controlling for the effects of factor productivity, trade, inflation, sectorial specialisation and trade intensity. A time-varying framework is employed to measure bilateral business cycle synchronisation in the first instance, and a panel approach is used to establish the role of fiscal variables in determining these bilateral synchronisations. The findings suggest similarities in the size of the public sector, as well as, divergence in fiscal policy matter for the determination of business cycle synchronisation. Hence, increased fiscal federalism in EMU will contribute to increased business cycle synchronisation. In addition, we show that trade intensity, inflation differentials and differences in capital productivity also matter for the level synchronization. These results remain robust to different specification and sub-periods.

Keywords: Time varying correlation; EU business cycles; business cycle synchronisation; fiscal policy (search for similar items in EconPapers)
JEL-codes: C E F O (search for similar items in EconPapers)
Pages: 34 pages
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:inf:wpaper:2018.02

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