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Output gap similarities in Europe: Detecting country groups

Markus Ahlborn and Marcus Wortmann

No 305, Center for European, Governance and Economic Development Research Discussion Papers from University of Goettingen, Department of Economics

Abstract: The literature on business cycle synchronization in Europe frequently presumes an alleged 'core-periphery' pattern without providing empirical verification of the underlying cyclical (dis)similarities or the supposed but unobservable 'European business cycle(s)'. To provide a data-based country group analysis, we apply a fuzzy clustering approach to quarterly output gap series of 27 European countries over the period 1996-2015. Our results confirm the existence of a persistent core cluster as opposed to clusters on the Eastern and Southern European peripheries, highlighting the inadequate composition of the euro area (EA). Moreover, we find that Germany's business cycle is not a suitable substitute for the core. By analyzing the relation between the identified 'European core business cycle' and the peripheral cycles over time, we show diverging patterns for the southern periphery after the financial crisis, casting doubt on the endogeneity properties of the EA.

Keywords: business cycles; core-periphery; euro area; fuzzy cluster analysis (search for similar items in EconPapers)
JEL-codes: C38 E32 F15 F45 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-mac and nep-sbm
Date: 2017
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