Eurozone cycles: an analysis of phase synchronization. New CGR working paper.

In 2007-08, many Eurozone members faced a systemic crisis (Reinhart and Rogoff, 2014) prompting research on the interaction of business and financial cycles (Claessens, Kose and Terrones, 2012; Egert, B. and D. Sutherland, 2014). Since then the Eurozone has known periods of recession and major slowdowns in economic activity. If business cycles are not synchronized, a one-size-fits-all monetary policy may not be optimal as some countries will be in the contraction phase while others will be in the recovery phase of their cycles. 

The motivation of this paper is to shed light on the degree of synchronization in the Economic and Monetary Union (EMU) business and financial (classical and growth) cycles across a subset of ten countries representative of the EMU for the full period 1960-2013 and in different sub-periods for both business and financial cycles. Both classical and growth cycles are examined in order to not only analyze synchronization in recessions and expansions but also synchronization in high-growth and low-growth periods.  Our results highlight the following:

We found no evidence of a classical business cycle in the Eurozone confirming that concordance in business cycles arises from synchronized deviations from the trend rather than synchronization of the underlying macroeconomic fundamentals. 

Financial cycles demonstrate significant concordance in both classical and growth cycles. Most countries spend more than 70% of the time in the same phase of their financial cycles. The only insignificant concordance occurs between the growth financial cycles of Greece and Belgium. Belgium spent the greatest proportion of time in the upturn of its growth financial cycle while Spain and Greece, the smallest fraction of time. France spent the greatest proportion of time, 63%, in the classical financial upturn. These results are consistent with the experiences of Spain and Greece in the Eurozone crisis, whilst France and Belgium were amongst the countries that fared relatively better.

Classical business cycles for several countries actually show a decrease in average concordance levels over the sample sub-periods, suggesting that Eurozone countries are moving away from a classical business cycle. For instance, Greece, Ireland and Portugal exhibited the greatest percentage decrease in average concordance levels of their classical business cycles which, in the identified sub-periods, were 35%, 22% and 19% respectively. 

In the years leading up to the Eurozone crisis, deviations were becoming more synchronized relative to trend. In the pre-crisis period 2003-2008, most of the classical business cycles exhibited the lowest average concordance while most of the growth business cycles showed the highest average concordance compared to earlier sub-periods.

Compared to growth cycles, classical business cycles demonstrate relatively much higher levels of average concordance before 1993-2002 which marks the introduction of the euro. 

Concordance between financial and business cycles for each country also arises from synchronized deviations rather than synchronized trends as the majority of the concordance indices between classical business and financial cycles do not demonstrate statistical significance. 
Continue reading the complete working paper: 

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