Business Cycle Synchronization in the Enlarged EU: Comovements in the New and Old Members

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Abstract
It is generally recognized that countries wanting to join a monetary union should display the optimal currency area properties. One such property is the similarity of business cycles. We therefore undertook to analyze the synchronization of business cycles between the EMU and eight new EU members from Central and Eastern European countries (CEECs), for which the next step to be considered in the integration process is entry into the EMU. In contrast to the usually analyzed GDP and industrial production data, we extend our analysis to the major expenditure and sectoral components of GDP and use several measures of synchronization. The main findings of the paper are that Hungary, Poland and Slovenia have achieved a high degree of synchronization with the EMU for GDP, industrial production and exports, but not for consumption and services. The other CEECs have achieved less or no synchronization. There has been a significant increase in the synchronization of GDP and also its major components in the EMU members since the start of the run-up to EMU. While this lends support for the existence of OCA endogeneity, it can not be unambiguously attributed to it because there is also evidence of a world business cycle. Another finding is that the consumption-correlation puzzle remains, but its magnitude has greatly diminished in the EMU members, which is good news for common monetary policy.