Developing Country Business Cycles: Characterising the Cycle

Classical business cycles, following Burns and Mitchell (1946), can be defined as the sequential pattern of expansions and contractions in aggregate economic activity. Recently, Harding and Pagan (2002, 2006) have provided an econometric toolkit for the analysis of these cycles, and this has resulted in a recent surge in researchers using these methods to analyse developing country business cycles. However, the existing literature consists of diminutive samples and the majority fail to consider the statistical significance of the concordance statistics. To address this shortfall, this paper examines the business cycle characteristics and synchronicity for thirty-two developing countries. Furthermore, the US, the UK and Japan are included; this provides benchmarks upon which to compare the characteristics of the developing country cycles and also to examine the degree of synchronisation between developed and developing countries. Significantly, this research reveals that business cycles of developing countries are not, as previously believed, significantly shorter than those of the developed countries. However, the amplitude of both expansion and contraction phases tends to be greater in the developing countries. Furthermore a clear relationship between the timing of business cycle fluctuations and periods of significant regional crises, such as the Asian Financial Crisis, is exhibited. However, the more specific timing of the onset of these fluctuations appears to be determined by country-specific factors. Moreover, there are no clear patterns of concordance either within regions or between developed and developing country business cycles.Classical business cycle, Turning points, Synchronisation, Concordance, Contagion, Developing economies

Regional economic cycles and the emergence of sheltered economies in the periphery of the EU

It has been claimed that in recent years the evolution of regional disparities within European nations has become pro-cyclical, that is, disparities tend to increase in times of economic boom and to decrease during recessions. This represents a change with respect to the traditional patterns in the 1960s and 1970s, when growth in European lagging regions was higher than in the core during periods of economic growth, but lagging regions were more affected by economic crises. In this paper we first assess where and when this change has happened and then analyse what are the factors behind the change in the evolution of disparities. We use a 20-year long database, comprising NUTS II regions in five European countries (France, Greece, Italy, Portugal and Spain) which include the great majority of European lagging regions. The evidence supports the shift to pro-cyclical patterns in the evolution of regional disparities, especially in those countries with a large number of Objective 1 regions (Spain, Italy and, less clearly, in Greece) whereas in France such a change has not yet occurred. Looking for the determinants of regional economic cycles, we conduct regression analyses finding that the shift in growth patterns is related to the emergence of what is known as sheltered economies, i.e. economies that are increasingly detached from the market, and thus increasingly impervious to economic cycles. Lagging European regions have become over the period of analysis increasingly dependant on factors such as transfers, public investment, and public employment and therefore less exposed to changes in market conditions.

Emerging Asia: Decoupling or Recoupling

In this paper, we investigate the degree of real economic interdependence between emerging Asia and major industrial countries to shed light on the heated debate over the “decoupling” of emerging Asia. We first document the evolution of macroeconomic interdependence for emerging Asian economies through changing trade and financial linkages at both the regional and global levels. Then, by employing a panel vector autoregression (VAR) model, we estimate the degree of real economic interdependence before and after the 1997/98 Asian financial crisis. Empirical findings show that real economic interdependence increased significantly in the post-crisis period, suggesting “recoupling”, rather than decoupling, in recent years. Output shocks from major industrial countries have a significant positive effect on emerging Asian economies. More interestingly, the reverse is also true. Output shocks from emerging Asia (and the People’s Republic of China [PRC]) have a significant positive effect on output in major industrial countries. The result suggests that macroeconomic interdependence between emerging Asia and industrial countries has become “bi-directional,” defying the traditional notion of the “North–South relationship” as one of “uni-directional" dependence.Regional integration; decoupling; macroeconomic interdependence; trade and financial market linkages; VAR

Costs of EMU from a regional approach: the Spanish case

In this paper we look at the impact of EMU on Spanish regional disparities in the framework of the Optimal Currency Areas theory and upon its distinction between benefits and costs of a monetary integration. In particular, here we want to deal with the main potential source of costs for the Spanish regions: the likelihood of asymmetric shocks in the economy. In this regard, we try to ascertain the degree of correlation among the business cycles of the Spanish regions, and also with respect to the European and Spanish cycle. The technique employed in the paper ( following Peiro, 2000) focuses on the cross correlations among relevant variables at the regional and the national level such as the behaviour of industrial production or the rate of inflation. We proceed in two steps. First we filter the series in order to get non-autocorrelated residuals. Next we compute the asymptotic distribution of the contemporaneus correlation among the variables in order to know to which extent business cycles behave according to a similar pattern. This method will shed some light on the question about the degree of comovements in the cycles. If the comovements seem to be high - as we expect, based upon other results -, then we may consider than the probability of the Spanish regions suffering asymmetric shocks is less severe.

A Common Election Day for Euro Zone Member States?

This paper tests for the Euro zone the hypothesis put forward by Sapir and Sekkat (1999) that synchronizing elections might improve welfare. After identifying a political budget cycle in the Euro zone we build a politico-macroeconomic model and simulate the effects of adopting a common election day in the 12 Euro zone member states. The results support most of the theoretical predictions by Sapir-Sekkat: (i) Synchronizing the elections could enhance GDP growth, reduce unemployment, but leads to increased inflation and in some countries to a deterioration of the budget; higher inflation forces ECB to monetary restrictions. (ii) If the synchronization happens asymmetrically - either only in the large or only in the small Euro zone countries - the result depends on the size of the spillovers. (iii) As anticipated in Sapir -Sekkat a common election day is a further step towards the desired "European business cycle", however, at the cost of increasing its amplitude. Harmonizing elections is another method of policy coordination. Whether this leads to higher welfare is a matter of weighting the different macroeconomic outcomes and it also depends on the model applied. (author's abstract)Series: EI Working Papers / Europainstitu

Is the EMU a viable common currency area? a VAR analysis of regional business cycles

Many commentators are skeptical about the long-run viability of the European Monetary Union (EMU). This article compares the EMU with a well-functioning currency union, the U.S., and finds that they are similar based on key criteria. On the basis of this analysis, the EMU may be as viable as the U.S. monetary union.Euro ; Euro-dollar market ; European Monetary System (Organization) ; Vector autoregression ; Business cycles

Has the Euro-Mediterranean partnership affected Mediterranean business cycles?

We date turning points of the reference cycle for 19 Mediterranean countries and analyze their structure and interdependences. Fluctuations are volatile and not highly correlated across countries; recessions are deep but asynchronous making average output losses in the area limited. Heterogeneities across countries and regions are substantial. Mediterranean cycles are time varying but their evolution is not linked with the Euro-Mediterranean partnership process. The concordance of cyclical fluctuations is poorly related to trade and financial linkages and to their evolution over time.Turning point dates, Reference cycles, Euro-Mediterranean partnership, trade and financial interdependences

ClubMed? Cyclical fluctuations in the Mediterranean basin

We investigate macroeconomic fluctuations in the Mediterranean basin, their similarities and convergence. A model with four indicators, roughly covering the West, the East and the Middle East and the North Africa portions of the Mediterranean, characterizes well the historical experience since the early 1980. Idiosyncratic causes still dominate domestic cyclical fluctuations in many countries. Convergence and divergence coexist are local and transitory. The cyclical outlook for the next few years is rosier for the East than for the West.Bayesian Methods; Business cycles; Mediterranean basin; Developing and developed countries.

Convergence in house prices across OECD countries: A panel data analysis

This study examines whether housing prices converged in OECD countries over the 1996–2015 period. The unconditional and conditional convergence hypotheses are tested via the system-GMM method using five-year span panel data of twenty OECD countries. The results reveal that there exists a significant convergence process within this country group. To test the conditional convergence hypothesis, the convergence equation is estimated also with some control variables that may reflect market activity and demand side impacts such as income level, construction, unemployment rate, permits for dwellings and share prices. The findings show that the speed of convergence is even higher when the above-mentioned variables are controlled

Macroeconomic Differentials and Adjustment in the Euro Area

There has recently been increased research and policy interest in the divergent macroeconomic performance in the European Economic and Monetary Union (EMU). Understanding the underlying factors of macroeconomic differentials, the source and transmission of shocks and the adjustment process in the euro area is important to appropriate economic policy in the EMU. In a monetary union, the single monetary policy can only address common shocks. In the absence of nominal interest and exchange rates as policy instruments, to adjust to asymmetric shocks country specific shocks or idiosyncratic effects of common shocks, member countries have to resort to remaining tools of economic policy. In theory, the adjustment to asymmetric shocks and return to equilibrium can take place through four channels: a) market driven price and output adjustment; b) policy induced fiscal adjustment; c) risk-sharing against country-specific shocks through fiscal transfers and financial integration; d) labour mobility. Temporary inflation and output growth differentials are likely in a common currency area since prices and output adjustment is required to absorb shocks. In the euro area, output growth and inflation differentials are also related to the ongoing catch - up process in some of the member countries. Persistent inflation differentials can have negative effects on incomes and investment and result in divergent competitiveness and monetary conditions in the participating countries. Furthermore, inappropriate use of national fiscal policy and real exchange rate adjustment can lead to poor macroeconomic performance. The objective of this paper is to analyse macroeconomic differentials and the adjustment in the euro area so far with the aim to draw lessons and policy implications for the better functioning of the EMU and euro areaenlargement. The questions we address are the following: What do we know about macroeconomic differentials in the euro area? Are they temporary or persistent? What factors underlie them? What is the likelihood of asymmetric shocks in the euro area and what are their main transmission channels? What policy issues related to the macroeconomic adjustment in the EMU are most important at this stage? The remainder of this study is organised as follows. In Section 2 we analyse the size, evolution, persistence and underlying factors of output growth and inflation differentials. Section 3 discusses the likelihood of asymmetric shocks and their transmission across the euro area countries. In particular, we analyse trade linkages, including intra- and extra-euro area trade, financial integration and business cycle synchronisation. In Section 4 we discuss a number of policy issues related to the macroeconomic adjustment in EMU which have gained increased interest recently. We start with the role and effects of real interest rate and competitiveness differentials as adjustment channels. We discuss next policy issues related to fiscal adjustment and the impact of fiscal shocks in the euro area countries. We then discuss labour mobility as an adjustment mechanism. Finally, Section 5 summarises the main findings and draws policy implications for the EMU and the euro area enlargement.European Economic and Monetary Union, International transmission of shocks, Macroeconomic adjustment