ARE BUSINESS CYCLES ALL ALIKE IN EUROPE?

Abstract

We investigate whether business cycles are all alike computing the welfare costs of business cycles for European-Union (EU) as the solution of the problem proposed by Lucas (1987). Because these countries have a long tradition of integration and trade, it is a "natural experiment" to investigate how similar their welfare costs of business cycles are. Using standard assumptions on preferences and a reasonable reduced form for consumption, we computed welfare costs using three alternative trend-cycle decomposition methods, but focusing on the multivariate Beveridge-Nelson decomposition. Our results show that welfare costs are very different across EU countries and between US and EU countries, and thus it is a strong evidence that business cycles are not alike in Europe.