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Macroeconomic Imbalances and Business Cycle Synchronization. Why Common Economic Governance is Imperative for the Eurozone

Author

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  • Elizaveta Lukmanova

    (Department of Economics, Vienna University of Economics and Business)

  • Gabriele Tondl

    (Department of Economics, Vienna University of Economics and Business)

Abstract
This paper investigates a new category of influential factors on business cycle synchronization (BCS), so far hardly regarded in the BCS literature: It provides an empirical assessment of the impact of macroeconomic imbalances, as monitored by the European Commission by the scoreboard indicators since 2011, on BCS in the Euozone. We use a quarterly data set covering the period 2002-2012 and estimate the direct and indirect effects of macroeconomic imbalances in the pre- and post-crisis period in a simultaneous equations model. Business cycle correlation between EA members is measured by the recently proposed dynamic conditional correlation of Engle 2002 which can better identify synchronous and asynchronous behaviour of BC than the commonly used measures. We find that appearing differences between EA members in the current account, in government deficit and public debt, in private debt and unit labor cost developments have reduced BCS in the EA, even more in the post-crisis period than before. Moreover, these explanatory factors of BCS, generally reinforce each other and are also influenced by other critical macro imbalances. Since BCS is essential in a monetary union, this paper provides clear support that a stronger, common economic governance would be important for the functioning and survival of the Eurozone.

Suggested Citation

  • Elizaveta Lukmanova & Gabriele Tondl, 2016. "Macroeconomic Imbalances and Business Cycle Synchronization. Why Common Economic Governance is Imperative for the Eurozone," Department of Economics Working Papers wuwp229, Vienna University of Economics and Business, Department of Economics.
    • Handle: RePEc:wiw:wiwwuw:wuwp229
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    2. Kapounek, Svatopluk & Kučerová, Zuzana, 2019. "Historical decoupling in the EU: Evidence from time-frequency analysis," International Review of Economics & Finance, Elsevier, vol. 60(C), pages 265-280.
    3. Kurt Bayer & Andreas Breitenfellner, 2018. "What is the appropriate role of structural reforms in E(M)U deepening?," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue Q3-18, pages 102-112.
    4. Benoit Dicharry & Lubica Stiblarova, 2023. "Positive externalities of the EU cohesion policy: Toward more synchronised CEE countries?," International Economics and Economic Policy, Springer, vol. 20(3), pages 485-508, July.
    5. Arčabić, Vladimir & Škrinjarić, Tihana, 2021. "Sharing is caring: Spillovers and synchronization of business cycles in the European Union," Economic Modelling, Elsevier, vol. 96(C), pages 25-39.
    6. Leonor Coutinho & Alessandro Turrini, 2020. "Real Convergence Across the Euro Area," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 55(5), pages 301-311, September.
    7. Rémi Odry & Roman Mestre, 2021. "Monetary Policy and Business Cycle Synchronization in Europe," EconomiX Working Papers 2021-19, University of Paris Nanterre, EconomiX.
    8. repec:cnb:ocpubv:as17 is not listed on IDEAS
    9. Shen, Jiancheng & Selover, David D. & Li, Chao & Yousefi, Hamed, 2022. "An ocean apart? The effects of US business cycles on Chinese business cycles," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 677-698.
    10. Lubica Stiblarova, 2024. "Transmission channels of the cohesion policy: direct and indirect effects on EA synchronicity," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 51(2), pages 379-402, May.
    11. Hwang, Sun Ho & Kim, Yun Jung, 2021. "International output synchronization at different frequencies," Economic Modelling, Elsevier, vol. 104(C).
    12. Horatiu DAN, 2019. "Joining The Euro Zone – An Exploration Of Real And Structural Convergence In Romania, Bulgaria And Croatia," Economic Archive, D. A. Tsenov Academy of Economics, Svishtov, Bulgaria, issue 1 Year 20, pages 19-32.
    13. Florian Morvillier, 2018. "On the impact of the launch of the euro on EMU macroeconomic vulnerability," EconomiX Working Papers 2018-51, University of Paris Nanterre, EconomiX.
    14. Florian Morvillier, 2018. "On the impact of the launch of the euro on EMU macroeconomic vulnerability," Working Papers hal-04141675, HAL.
    15. Su, Xianfang & Chen, Meixia, 2024. "Financial connectedness in BRICS: Quantile effects and BRICS SUMMIT impacts," The North American Journal of Economics and Finance, Elsevier, vol. 72(C).
    16. repec:cnb:ocpubv:as22 is not listed on IDEAS
    17. Depren, Özer & Kartal, Mustafa Tevfik & Kılıç Depren, Serpil, 2021. "Changes of gold prices in COVID-19 pandemic: Daily evidence from Turkey's monetary policy measures with selected determinants," Technological Forecasting and Social Change, Elsevier, vol. 170(C).
    18. Szafranek, Karol, 2021. "Disentangling the sources of inflation synchronization. Evidence from a large panel dataset," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 229-245.
    19. Szafranek, Karol, 2021. "Evidence on time-varying inflation synchronization," Economic Modelling, Elsevier, vol. 94(C), pages 1-13.

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    More about this item

    Keywords

    Business cycle synchronization; Macroeconomic imbalances; Monetary union; Euro Area; Simultaneous equations model; Panel data;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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