Fiscal Divergence and Business Cycle Synchronization: Irresponsibility is Idiosyncratic
Budapest University of Economic Sciences and Public Administration
Andrew K. Rose
University of California - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
National Bank of Hungary
NBER Working Paper No. w11580
Using a panel of 21 OECD countries and 40 years of annual data, we find that countries with similar government budget positions tend to have business cycles that fluctuate more closely. That is, fiscal convergence (in the form of persistently similar ratios of government surplus/deficit to GDP) is systematically associated with more synchronized business cycles. We also find evidence that reduced fiscal deficits increase business cycle synchronization. The Maastricht %u201Cconvergence criteria,%u201D used to determine eligibility for EMU, encouraged fiscal convergence and deficit reduction. They may thus have indirectly moved Europe closer to an optimum currency area, by reducing countries%u2019 abilities to create idiosyncratic fiscal shocks. Our empirical results are economically and statistically significant, and robust.
Number of Pages in PDF File: 37working papers series
Date posted: October 17, 2005
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