Business Cycle Convergence or Decoupling? Economic Adjustment in CESEE During the Crisis

25 Pages Posted: 18 Mar 2013 Last revised: 31 Jan 2014

See all articles by Martin Gächter

Martin Gächter

University of Innsbruck - Department of Economics & Statistics; Oesterreichische Nationalbank (OeNB), Foreign Research Division

Aleksandra Riedl

Oesterreichische Nationalbank (OeNB), Foreign Research Division

Doris Ritzberger-Grünwald

Oesterreichische Nationalbank (OeNB), Foreign Research Division

Date Written: February 5, 2013

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

JEL Classification: E32, E52, F15, F33, F44

Suggested Citation

Gächter, Martin and Riedl, Aleksandra and Ritzberger-Grünwald, Doris, Business Cycle Convergence or Decoupling? Economic Adjustment in CESEE During the Crisis (February 5, 2013). BOFIT Discussion Paper No. 3/2013. Available at SSRN: https://ssrn.com/abstract=2235041 or http://dx.doi.org/10.2139/ssrn.2235041

Martin Gächter (Contact Author)

University of Innsbruck - Department of Economics & Statistics ( email )

Universitaetsstrasse 15/4
Innsbruck, 6020
Austria
+43 512 507 7164 (Phone)

HOME PAGE: http://www.uibk.ac.at

Oesterreichische Nationalbank (OeNB), Foreign Research Division ( email )

Otto-Wagner-Platz 3
1090 Vienna
Austria

Aleksandra Riedl

Oesterreichische Nationalbank (OeNB), Foreign Research Division ( email )

Otto-Wagner-Platz 3
1090 Vienna
Austria

Doris Ritzberger-Grünwald

Oesterreichische Nationalbank (OeNB), Foreign Research Division ( email )

Otto-Wagner-Platz 3
1090 Vienna
Austria

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