Business Cycle Synchronization and Asymmetry in the European Union

Abstract

We analyze business cycle movements and synchronization in the European Union (EU) for all members. We show that both the estimated output gaps and the level of synchronization depend on the statistical measures used by the researcher. To account for this, we employ a large set of output gaps, and we use both a forecasting-based simple average and a Phillips Curve motivated weighted average. Similarly, we measure synchronization using different measures that account for correlations and for the business cycle phase and amplitude. Two sets of robust results emerge. First, our estimated gaps match recession dates well and suggest that many of the countries exhibit a high degree of business cycle nonlinearities. Second, the core Eurozone countries are highly synchronized, but there are large differences in synchronization among non-Eurozone and peripheral Eurozone member states. Synchronization varies over time; it increased substantially before the Global financial crisis and decreased afterwards.

Keywords: business cycle synchronization, output gaps, business cycle asymmetry, Eurozone

JEL Classification: E32, E37, E52, F44, C22