Fiscal Divergence and Business Cycle Synchronization: Irresponsibility is Idiosyncratic

37 Pages Posted: 17 Oct 2005 Last revised: 24 Aug 2010

See all articles by Zsolt Darvas

Zsolt Darvas

Budapest University of Economic Sciences and Public Administration

Andrew Kenan Rose

University of California - Haas School of Business; NUS Business School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Gyorgy Szapary

Magyar Nemzeti Bank

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Date Written: August 2005

Abstract

Using a panel of 21 OECD countries and 40 years of annual data, we find that countries with similar government budget positions tend to have business cycles that fluctuate more closely. That is, fiscal convergence (in the form of persistently similar ratios of government surplus/deficit to GDP) is systematically associated with more synchronized business cycles. We also find evidence that reduced fiscal deficits increase business cycle synchronization. The Maastricht %u201Cconvergence criteria,%u201D used to determine eligibility for EMU, encouraged fiscal convergence and deficit reduction. They may thus have indirectly moved Europe closer to an optimum currency area, by reducing countries%u2019 abilities to create idiosyncratic fiscal shocks. Our empirical results are economically and statistically significant, and robust.

Suggested Citation

Darvas, Zsolt and Rose, Andrew Kenan and Szapary, Gyorgy, Fiscal Divergence and Business Cycle Synchronization: Irresponsibility is Idiosyncratic (August 2005). NBER Working Paper No. w11580, Available at SSRN: https://ssrn.com/abstract=788445

Zsolt Darvas

Budapest University of Economic Sciences and Public Administration ( email )

Budapest H-1093
Hungary

HOME PAGE: http://www.uni-corvinus.hu/darvas

Andrew Kenan Rose (Contact Author)

University of California - Haas School of Business ( email )

Berkeley, CA 94720
United States
510-642-6609 (Phone)
510-642-4700 (Fax)

HOME PAGE: http://faculty.haas.berkeley.edu/arose

NUS Business School ( email )

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Singapore

National Bureau of Economic Research (NBER)

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United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Gyorgy Szapary

Magyar Nemzeti Bank ( email )

Szabadsag ter 8-9
Budapest, H-1850
Hungary

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