Financial Sector and Business Cycles Determinants in the EMU: An Empirical Approach (1996-2011)

This paper investigates potential business cycles determinants for the EMU countries among financial sector indicators examining at the same time the link between financial sector variables and business cycles volatility. We find that the total value of stocks traded, the private sector debt and the net inflows of FDI constitute significant determinants of business cycles fluctuations. Financial openness has an increasing effect on business cycles volatility while there is an unsettled relationship between financial depth and volatility. Another important finding of the paper is that the analysis provides evidence in favor of the occurrence of opportunistic political business cycles among EMU counterparts. The robustness of the above findings is verified via the use of relevant econometric methods such as EGLS, GLM and fixed-effect models.