Has the Euro Changed the Business Cycle?

42 Pages Posted: 29 Jul 2012

See all articles by Philip Jung

Philip Jung

University of Bonn

Zeno Enders

University of Heidelberg

Gernot J. Müller

University of Tuebingen - Department of Economics

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Date Written: September 23, 2010

Abstract

In contrast to the notion that the exchange-rate regime is non-neutral, there is little evidence that EMU has changed the European business cycle. In fact, we find the volatility of macroeconomic fundamentals largely unchanged before and after the introduction of the euro. Exceptions are a strong decline in real exchange rate volatility and a number of changes in cross-country correlations. To account for this finding, we develop a two-country business cycle model which is able to replicate key features of European data. In particular, the model correctly predicts a limited effect of EMU on standard business cycles statistics. However, further analysis reveals that the euro has changed the nature of the cycle through its impact on the transmission mechanism. Cross-country spillovers have become relatively more, domestic shocks relatively less important in accounting for economic fluctuations under EMU. This explains why there is little change in unconditional volatilities.

Suggested Citation

Jung, Philip and Enders, Zeno and Müller, Gernot J., Has the Euro Changed the Business Cycle? (September 23, 2010). Available at SSRN: https://ssrn.com/abstract=2119446 or http://dx.doi.org/10.2139/ssrn.2119446

Philip Jung (Contact Author)

University of Bonn ( email )

Simrockstr.4
Bonn, 53113
Germany

Zeno Enders

University of Heidelberg ( email )

Gernot J. Müller

University of Tuebingen - Department of Economics ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

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