Research Discussion Papers, Bank of Finland
No 12/2005:
Decomposing the co-movement of the business cycle: a time-frequency analysis of growth cycles in the euro area
Patrick Crowley ()
and Jim Lee
Abstract: This article analyses the frequency components of European
business cycles using real GDP by employ-ing multiresolution decomposition
(MRD) with the use of maximal overlap discrete wavelet transforms (MODWT).
Static wavelet variance and correlation analysis is performed, and phasing
is studied using co-correlation with the euro area by scale. Lastly dynamic
conditional correlation GARCH models are used to obtain dynamic correlation
estimates by scale against the EU to evaluate synchronicity of cycles
through time. The general findings are that euro area members fall into one
of three categories: i) high and dynamic correlations at all frequency
cycles (eg France, Belgium, Germany), ii) low static and dy-namic
correlations, with little sign of convergence occurring (eg Greece), and
iii) low static correlation but convergent dynamic correlations (eg Finland
and Ireland).
Keywords: business cycles; growth cycles; European Union; multiresolution analysis; wavelets; co-correlation; dynamic correlation; (follow links to similar papers)
JEL-Codes: C65; E32; O52; (follow links to similar papers)
72 pages, May 11, 2005
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