Weekly Economics Webinar by Vladimir Arcabic
October 1 @ 1:30 pm - 2:40 pm
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Title: Business Cycle Synchronization and Asymmetry in the European Union
Speaker: Vladimir Arcabic, Assistant Professor, University of Zagreb
Abstract: This paper uses different measures of the output gap to analyze business cycle synchronization in the European Union (EU) for all EU members both before and after the Global Financial Crisis. To overcome the statistical disadvantages of using a single estimate of the output gap we employ a large set of output gaps, and we use both a forecasting-based simple average and a Phillips Curve Coherent weighted average. Our estimated gaps account for business cycle asymmetry and match recession dates well.We measure synchronization using several different measures that take into account the correlation between different output gaps, the business cycle phase, and the business cycle amplitude. Our results suggest that many of the countries exhibit a high degree of business cycle nonlinearities. The core Eurozone countries are highly synchronized, but there are large differences in business cycle synchronization among non-Eurozone and peripheral Eurozone member states. These differences cannot be captured by simple correlation, but they are clearly evident from output gap synchronicity and similarity measures. Business cycle synchronization varies over time; it increased substantially before the Global financial crisis and decreased afterward. We find that the biggest challenge for the common monetary policy is a low output gap similarity, which could possibly undermine a one-size-fits-all approach to policy.