Evaluating the Synchronisation of the Eurozone Business Cycles using Multivariate Coincident Macroeconomic Indicators

This paper offers an insight into the optimality of the European Economic and Monetary Union (EMU) and its common monetary policies by evaluating the degree of business cycle synchronisation among the EMU member states with respect to the Eurozone aggregate. Business cycles for each country, defined by turning points, are extracted from multivariate coincident macroeconomic variables by using both classical and modern business cycle dating procedures, including the Bry-Boschan Quarterly (BBQ) algorithm, the multivariate dynamic-factor model and the multivariate dynamic-factor Markov-switching (DFMS) model. The degree of cycle synchronisation between the EMU members and the Eurozone aggregate is measured using the index of concordance, the mean corrected index of concordance and correlation-coefficients. The inference provided by the pairwise correlation-coefficients of the smoothed recession probabilities in the dynamic-factor Markov-switching model is also used to indicate cycle corrections. Overall, close cycle correlations are found between the Eurozone aggregate and the core EMU countries. A catching-up process of cycle convergence is observed in some of the peripheral countries (Spain and Finland), perhaps as a result of participating in the ERM and the EMU. To date there have been few studies measuring cycle synchronisation using business cycles extracted from multivariate coincident macroeconomic indicators for the EMU countries. This paper contributes to this area.