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On the behavioral antecedents of business cycle coherence in the euro area

Petar Sorić, Ivana Lolić and Marija Logarušić ()
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Marija Logarušić: Faculty of Economics and Business, University of Zagreb

No 2104, EFZG Working Papers Series from Faculty of Economics and Business, University of Zagreb

Abstract: Departing from the mainstream literature on European monetary integration, we acknowledge the interdependence of economic sentiment synchronization and business cycle co-movements for 17 individual European countries and the euro area (EA). Building upon both hard and soft data, we find that sentiment cycles are in fact the driving force behind general economic cycle synchronization. This finding is robust with respect to different synchronization indicators, different Granger causality test specifications, data frequencies (monthly vs. quarterly), and the targeted EA composition (EA11 vs. EA19). The latter is of particular importance, implying that recent EA enlargements have not decreased its homogeneity in this regard. Our results exhibit a certain degree of dependence upon the business cycle phase. The synchronization of 17 examined countries vis-a-vis the EA seems to be even more intensive in recessions than in expansions. In other words, common monetary policy of the ECB should be able to effectively act as a countercyclical tool when an individual national economy is facing a recession.

Keywords: economic sentiment; business cycle synchronization; Optimum Currency Areas; Euro (search for similar items in EconPapers)
JEL-codes: C32 E32 E58 E71 (search for similar items in EconPapers)
Pages: 28
Date: 2021-03-11
New Economics Papers: this item is included in nep-cba, nep-eec and nep-mac
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Handle: RePEc:zag:wpaper:2104