Does Integration and Economic Policy Coordination Promote Business Cycle Synchronization in the EU?

Antonakakis, Nikolaos ORCID: and Tondl, Gabriele (2014) Does Integration and Economic Policy Coordination Promote Business Cycle Synchronization in the EU? Empirica, 41 (3). pp. 541-575. ISSN 0340-8744


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Previous studies have discounted important factors and indirect channels that might contribute to business cycle synchronization (BSC) in the EU. We estimate the effects of market integration and economic policy coordination on bilateral business cycle correlations over the period 1995-2012 using a simultaneous equations model that takes into accounts both the endogenous relationships and unveils direct and indirect effects. The results suggest that (i) trade and FDI have a pronounced positive effect on BCS, particularly between incumbent and new EU members. (ii) Rising specialization does not decouple business cycles. (iii) The decline of income disparities in EU27 contributes to BCS, as converging countries develop stronger trade and FDI linkages. (iv) There is strong evidence that poor fiscal discipline of EU members is a major impediment of business cycle synchronization. (v) The same argument holds true for exchange rate fluctuations that hinder BCS, particularly in EU15. Since BCS is a fundamental prerequisite and objective in an effective monetary union, the EU has to promote market integration and strengthen the common setting of economic policies.

Item Type: Article
Additional Information: The final publication is available at Springer via Access to the published version requires a subscription.
Keywords: Business cycle / synchronization / transmission / direct and indirect effect / FDI / trade / monetary union / EU
Classification Codes: JEL E30, E52, E62, F15, F42, F44
Divisions: Departments > Volkswirtschaft > Internationale Wirtschaft
Version of the Document: Accepted for Publication
Variance from Published Version: Typographical
Depositing User: Nikolaos Antonakakis
Date Deposited: 09 Apr 2014 13:14
Last Modified: 07 Nov 2019 09:04
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