Business Cycle Synchronization and Asymmetry in the European Union

Abstract

We analyze business cycle movements and synchronization for all European Union members. To account for model uncertainty in the output gap estimation, we propose averaging across a set of output gap models both by using a Phillips Curve motivated weighted average and a simple average. Similarly, we measure synchronization using a set of measures that account for the business cycle phase and amplitude. Three sets of robust results emerge. First, when using a single model, both the estimated gaps and the level of synchronization can send different signals depending on the statistical model used by the researcher. Second, our averaged estimated gaps match recession dates well and suggest that many of the countries exhibit a high degree of business cycle nonlinearities both for the 1975-pre-COVID period and 1975q1-2022q4. Finally, the core Eurozone countries are highly synchronized, but there are differences in synchronization among non-Eurozone and peripheral Eurozone member states.

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

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