BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 3/2013:
Business cycle convergence or decoupling? Economic adjustment in CESEE during the crisis
Martin Gächter ()
, Aleksandra Riedl ()
and Doris Ritzberger-Grünwald ()
Abstract: We analyze business cycle convergence in the EU by
focusing on the decoupling vs. convergence hypothesis for central, eastern
and south eastern Europe (CESEE). In a nutshell, we fnd that business
cycles in CESEE have decoupled considerably from the euro area (EA) during
the financial crisis in terms of both cyclical dispersion (i.e. the
deviation of output gaps) and cyclical correlation. The results are mainly
driven by smaller countries, which can be explained by the fact that small
economies seem to have larger cyclical swings as they are more dependent on
external demand, which causes a decoupling in terms of higher output gap
deviations from the EA cycle in times of economic crises. At the same time,
this does not necessarily affect business cycle synchronization as measured
by cyclical correlations, where the strength of the linear relationship of
two cycles is measured. However, despite the recent declines in the
co-movement, we generally observe high correlation levels of CESEE
countries with the EA after their EU accession in 2004. Finally, we find a
significant decoupling of trend growth rates between EA and CESEE until the
onset of the financial crises. Since the beginning of the crisis, trend
growth rates have declined both in CESEE and the EA with the trend growth
differential decreasing significantly from about three to below two
percentage points in 2011.
Keywords: business cycles; EMU; CESEE; optimum currency areas; (follow links to similar papers)
JEL-Codes: E32; E52; F15; F33; F44; (follow links to similar papers)
25 pages, February 5, 2013
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