Has the Euro Changed the Business Cycle?

41 Pages Posted: 1 Feb 2013

See all articles by Zeno Enders

Zeno Enders

University of Heidelberg

Philip Jung

University of Bonn

Gernot J. Müller

University of Tuebingen - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: November 2012


In contrast to the notion that the exchange-rate regime is non-neutral, there is little evidence that EMU has systematically changed the European business cycle. In fact, we find the volatility of macroeconomic variables largely unchanged before and after the introduction of the euro. Exceptions are a strong decline in real exchange rate volatility and a considerable increase 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.

Keywords: cross-country spillovers, EMU, euro, European business cycles, exchange rate regime, monetary policy, optimum currency area

JEL Classification: E32, F41, F42

Suggested Citation

Enders, Zeno and Jung, Philip and Müller, Gernot J., Has the Euro Changed the Business Cycle? (November 2012). CEPR Discussion Paper No. DP9233, Available at SSRN: https://ssrn.com/abstract=2210202

Zeno Enders (Contact Author)

University of Heidelberg ( email )

Philip Jung

University of Bonn ( email )

Bonn, 53113

Gernot J. Müller

University of Tuebingen - Department of Economics ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074

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