Business cycle synchronisation in EMU: Can fiscal policy bring member-countries closer?

Stavros Degiannakis, David Duffy, George Filis, Alexandra Livada

Research output: Contribution to journalArticle

3 Citations (Scopus)

Abstract

The present study adds to the literature on the impact of fiscal policy on business cycle synchronisation. Specifically, it investigates the effects of fiscal policy on business cycle synchronisation between 10 EMU member-countries and the aggregate EMU12-wide business cycle, using a time-varying framework. The findings suggest that fiscal policy has important effects on business cycle synchronisation for all 10 EMU countries. Hence, fiscal policy is shown to have the potential to be supportive of macroeconomic stabilisation in the Eurozone. However, the evidence reveals that none of the countries under examination consistently uses fiscal policy to promote business cycle synchronisation.
LanguageEnglish
Pages551-563
JournalEconomic Modelling
Volume52
Issue numberB
Early online date27 Oct 2015
DOIs
Publication statusPublished - Jan 2016

Fingerprint

Business cycle synchronization
Fiscal policy
Business cycles
Macroeconomic stabilization
Time-varying
Euro zone

Keywords

  • Time-varying correlation
  • EMU business cycle
  • Business cycle synchronisation
  • Fiscal policy
  • Diag-BEKK model

Cite this

Degiannakis, Stavros ; Duffy, David ; Filis, George ; Livada, Alexandra. / Business cycle synchronisation in EMU: Can fiscal policy bring member-countries closer?. 2016 ; Vol. 52, No. B. pp. 551-563.
@article{9e6609180049491991431075fa14b0df,
title = "Business cycle synchronisation in EMU: Can fiscal policy bring member-countries closer?",
abstract = "The present study adds to the literature on the impact of fiscal policy on business cycle synchronisation. Specifically, it investigates the effects of fiscal policy on business cycle synchronisation between 10 EMU member-countries and the aggregate EMU12-wide business cycle, using a time-varying framework. The findings suggest that fiscal policy has important effects on business cycle synchronisation for all 10 EMU countries. Hence, fiscal policy is shown to have the potential to be supportive of macroeconomic stabilisation in the Eurozone. However, the evidence reveals that none of the countries under examination consistently uses fiscal policy to promote business cycle synchronisation.",
keywords = "Time-varying correlation, EMU business cycle, Business cycle synchronisation, Fiscal policy, Diag-BEKK model",
author = "Stavros Degiannakis and David Duffy and George Filis and Alexandra Livada",
note = "Reference text: Acconcia, A., Corsetti, G., Simonelli, S., 2014. Mafia and public spending: evidence on the fiscal multiplier from a quasi-experiment. Am. Econ. Rev. 104 (7), 2185–2209. Agresti, A.M., Mojon, B., 2001. Some stylised facts on the Euro area business cycle. ECB Working Paper series No. 95. Alesina, A., Ardagna, S., 2010. Large changes in fiscal policy: taxes versus spending. Tax Policy Econ. 24, 35–68. Alesina, A., Barro, R.J., 2002. Currency unions. Q. J. Econ. 117, 409–436. Alesina, A., Perotti, R., 1995. Fiscal expansions and adjustments in OECD countries. Econ. Policy 21, 207–248. Alesina, A., Perotti, R., Tavares, J., 1998. The political economy of fiscal adjustments. Brook. Pap. Econ. Act. 1, 197–266. Alesina, A., Ardagna, S., Perotti, R., Schiantarelli, F., 2002. Fiscal policy, profits, and investment. Am. Econ. Rev. 92 (2), 571–589. Artis, M., Krolzig, H.M., Toro, J., 2004. The European business cycle. Oxf. Econ. Pap. 56, 1–44. Auerbach, A.J., Gorodnichenko, Y., 2012. Fiscal multipliers in recession and expansion. In: Fiscal Policy After the Financial Crisis. University of Chicago Press, pp. 63–98. Baba, Y., Engle, R.F., Kraft, D., Kroner, K.F., 1990. Multivariate Simultaneous Generalized ARCH. Department of Economics, University of California, San Diego, Mimeo. Barry, F.G., Devereux, M.B., 1995. The 'expansionary fiscal contraction' hypothesis: a neoKeynesian analysis. Oxf. Econ. Pap. 47, 249–264. Barry, F.G., Devereux, M.B., 2003. Expansionary fiscal contraction: a theoretical exploration. J. Macroecon. 25, 1–23. Baxter, M., King, R.G., 1999. Measuring business cycles: approximate band-pass filters for economic time series. Rev. Econ. Stat. 81, 575–593. Bearce, H.D., 2009. EMU: the last stand for the policy convergence hypothesis? J. Eur. Public Policy 16, 582–600. Beetsma, R., Giuliodori, M., Klaassen, F., 2006. Trade spill‐overs of fiscal policy in the European Union: a panel analysis. Econ. Policy 21, 639–687. Bergman, U.M., 2006. Are European business cycles converging? Department of Economics, University of Copenhagen, Research Paper Bertola, G., Drazen, A., 1993. Trigger points and budget cuts: explaining the effects of fiscal austerity. Am. Econ. Rev. 83 (1), 11–26. Blanchard, O.J., 1990. Discussion in F. Giavazzi and M. Pagano 1990. Can severe fiscal contractions be expansionary? A tale of two small European countries. NBER Macroecon. Annu. 5, 111–116. Blanchard, O., Perotti, R., 2002. An empirical characterization of the dynamic effects of changes in government spending and taxes on output. Q. J. Econ. 117 (4), 1329–1368. Bollerslev, T., Wooldridge, J.M., 1992. Quasi-maximum likelihood estimation and inference in dynamic models with time-varying covariances. Econ. Rev. 11, 143–172. Bollerslev, T., Engle, R.F., Wooldridge, J.M., 1988. A capital asset pricing model with timevarying covariances. J. Polit. Econ. 96, 116–131. Boschi, M., Girardi, A., 2011. The contribution of domestic, regional and international factors to Latin America's business cycle. Econ. Model. 28 (3), 1235–1246. B{\"o}wer, U., Guillemineau, C., 2006. Determinants of business cycle synchronisation across Euro area countries. ECB Working Paper Series No. 587. Burns, A.F., Mitchell, W.C., 1946. Measuring Business Cycles. National Bureau of Economic Research, New York. Calderon, C., Chong, A., Stein, E., 2007. Trade intensity and business cycle synchronisation: are developing countries any different? J. Int. Econ. 71 (1), 2–21. Candelon, B., Muyskeny, J., Vermeulen, R., 2010. Fiscal policy and monetary integration in Europe: an update. Oxf. Econ. Pap. 62, 323–349. Canova, F., Dellas, H., 1993. Trade interdependence and the international business cycle. J. Int. Econ. 34, 23–47. Cassette, A., Creel, J., Farvaque, E., Paty, S., 2013. Governments under influence: country interactions in discretionary fiscal policy. Econ. Model. 30, 79–89. Cerqueira, P.A., Martins, R., 2011. Is there a political dimension on business cycle synchronisation? Kyklos 64, 329–341. Chen, X., Mills, T.C., 2009. Evaluating growth cycle synchronisation in the EU. Econ. Model. 26 (2), 342–351. Christiano, L., Fitzgerald, T.J., 2003. The bandpass filter. Int. Econ. Rev. 44, 435–465. Clarida, R., Gali, J., Gertler, M., 1999. The science of monetary policy: a new Keynesian perspective. J. Econ. Lit. 37, 1661–1707. Cogan, J.F., Cwik, T., Taylor, J.B., Wieland, V., 2010. New Keynesian versus old Keynesian government spending multipliers. J. Econ. Dyn. Control. 34 (3), 281–295. Colciago, A., Ropele, T., Muscatelli, V.A., Tirelli, P., 2008. The role of fiscal policy in a monetary union: are national automatic stabilizers effective? Rev. Int. Econ. 16 (3), 591–610. Corsetti, G., Meier, A., M{\"u}ller, G.J., 2010. Cross-border spillovers from fiscal stimulus. Int. J. Cent. Bank. 6 (1), 5–37. Corsetti, G., Meier, A., M{\"u}ller, G.J., 2012. What determines government spending multipliers? Econ. Policy 27 (72), 521–565. Crespo-Cuaresma, J., Pfaffermayr, M., Amador, O.F., Keppelet, C., 2011. Macroeconomic aspects of European integration: fiscal policy, trade integration and the European business cycle. FIW Research Report, No. 4, March. Crowley, P.M., Schultz, A., 2010. Measuring the intermittent synchronicity of macroeconomic growth in Europe, American Consortium on European Union Studies (ACES). Working Paper No. 2010.1. Darvas, Z., Rose, A.K., Szap{\'a}ry, G., 2005. Fiscal divergence and business cycle synchronisation: irresponsibility is idiosyncratic (No. w11580). National Bureau of Economic Research. Degiannakis, S., Duffy, D., Filis, G., 2014. Business cycle synchronisation in EU: a timevarying approach. Scott. J. Polit. Econ. 61 (4), 348–370. deHaan, J., Inklaar, R., Jong-a Pin, R., 2008. Will business cycles in the euro area converge? A critical survey of empirical research. J. Econ. Surv. 22, 234–273. Drazen, A., 1990. Can severe fiscal contractions be expansionary? (1990) In: Giavazzi, F., Pagano, M. (Eds.), A Tale of Two Small European Countries. NBER Macroecon. Annu. 5, pp. 117–122. Drazen, A., 2000. Political Economy in Macroeconomics, Princeton University Press; New Jersey. Dufr{\'e}not, G., Keddad, B., 2014. Business cycles synchronisation in East Asia: a Markovswitching approach. Econ. Model. 42, 186–197. Engle, R.F., 2002. Dynamic conditional correlation: a simple class of multivariate GARCH models. J. Bus. Econ. Stat. 20, 339–350. Engle, R.F., Kroner, K.F., 1995. Multivariate simultaneous generalized ARCH. Econometric Theory 11, 122–150. Engle, R.F., Granger, C.W.J., Kraft, D., 1986. Combining competing forecasts of inflation using a bivariate ARCH model. J. Econ. Dyn. Control. 8, 151–165. Fatas, A., Mihov, I., 2003. The case of restricting fiscal policy discretion. Q. J. Econ. 118, 1419–1447. Fatas, A., Mihov, I., 2006. The macroeconomics effects of fiscal rules in the US states. J. Public Econ. 90, 101–117. Fat{\'a}s, A., Mihov, I., 2008. Fiscal discipline, volatility and growth. In: Perry, G., Serven, L., Suescun, R. (Eds.), Fiscal policy, stabilization, and growth: prudence or abstinence? World Bank Publications, Washington D.C. Fatas, A., Mihov, I., 2009. The Euro and fiscal policy. NBER Working Paper No. 14722. National Bureau of Economic Research. Frankel, J.A., Rose, A.K., 1998. The endogeneity of the optimum currency area criteria. Econ. J. 108, 1009–1025. Furceri, D., 2009. Fiscal convergence, business cycle volatility, and growth. Rev. Int. Econ. 17, 615–630. Furceri, D., Karras, G., 2008. Business-cycle synchronization in the EMU. Appl. Econ. 40 (12), 1491–1501. Gali, J., Perotti, R., 2003. Fiscal policy and monetary integration in Europe. Econ. Policy 18, 533–572. Giavazzi, F., Pagano, M., 1990. Can severe fiscal contractions be expansionary? Tales of two small European countries, NBER Macroecon. Annu. 5, 75–122. Giavazzi, F., Pagano, M., 1996. Non-Keynesian effects of fiscal policy changes: international evidence and the Swedish experience. Swed. Econ. Policy Rev. 3 (3), 67–103. Giuliodori, M., Beetsma, R., 2004. What are the spill-overs from fiscal shocks in Europe: An Empirical Analysis. European Central Bank, Working Paper Series, 325. Hodrick, R., Prescott, E., 1997. Postwar U.S. business cycles: an empirical investigation. J. Money, Credit, Bank. 29, 1–16. Ilzetzki, E., Mendoza, E.G., V{\'e}gh, C.A., 2013. How big (small?) are fiscal multipliers? J. Monet. Econ. 60 (2), 239–254. Imbs, J., 2004. Trade, finance, specialization and synchronisation. Rev. Econ. Stat. 86, 723–734. Imbs, J., 2006. The real effects of financial integration. J. Int. Econ. 68, 296–324. Inklaar, R., Jong-a Pin, R., de Haan, J., 2008. Trade and business cycle synchronisation in OECD countries—a re-examination. Eur. Econ. Rev. 52, 646–666. International Monetary Fund, 2010. World Economic Outlook: Recovery Risk and Rebalancing (October 2010). Kenen, P., 1969. The Theory of Optimum Currency Areas. In: Mundell, R., Swoboda, A. (Eds.), Monetary Problems in the International Economy. University of Chicago Press, Chicago. Kose, M.A., Yi, K.M., 2006. Can the standard international business cycle model explain the relation between trade and comovement? J. Int. Econ. 68 (2), 267–295. Kose, M.A., Prasad, E., Terrones, M., 2003a. How does globalization affect the synchronisation of business cycles? Am. Econ. Rev. 93, 57–62. Kose, M.A., Otrok, C., Whiteman, C., 2003b. International business cycles: world, region and country specific factors. Am. Econ. Rev. 93, 1216–1239. Kose, M.A., Otrok, C., Whiteman, C., 2008. Understanding the evolution of world business cycles. J. Int. Econ. 75 (1), 110–130. Krugman, P., 2012. End this depression now! WW Norton & Company, New York. Lane, P.R., 2003. 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Business cycle synchronisation in EMU: Can fiscal policy bring member-countries closer? / Degiannakis, Stavros; Duffy, David; Filis, George; Livada, Alexandra.

Vol. 52, No. B, 01.2016, p. 551-563.

Research output: Contribution to journalArticle

TY - JOUR

T1 - Business cycle synchronisation in EMU: Can fiscal policy bring member-countries closer?

AU - Degiannakis, Stavros

AU - Duffy, David

AU - Filis, George

AU - Livada, Alexandra

N1 - Reference text: Acconcia, A., Corsetti, G., Simonelli, S., 2014. Mafia and public spending: evidence on the fiscal multiplier from a quasi-experiment. Am. Econ. Rev. 104 (7), 2185–2209. Agresti, A.M., Mojon, B., 2001. Some stylised facts on the Euro area business cycle. ECB Working Paper series No. 95. Alesina, A., Ardagna, S., 2010. Large changes in fiscal policy: taxes versus spending. Tax Policy Econ. 24, 35–68. Alesina, A., Barro, R.J., 2002. Currency unions. Q. J. Econ. 117, 409–436. Alesina, A., Perotti, R., 1995. Fiscal expansions and adjustments in OECD countries. Econ. Policy 21, 207–248. Alesina, A., Perotti, R., Tavares, J., 1998. The political economy of fiscal adjustments. Brook. Pap. Econ. Act. 1, 197–266. Alesina, A., Ardagna, S., Perotti, R., Schiantarelli, F., 2002. Fiscal policy, profits, and investment. Am. Econ. Rev. 92 (2), 571–589. Artis, M., Krolzig, H.M., Toro, J., 2004. The European business cycle. Oxf. Econ. Pap. 56, 1–44. Auerbach, A.J., Gorodnichenko, Y., 2012. Fiscal multipliers in recession and expansion. In: Fiscal Policy After the Financial Crisis. University of Chicago Press, pp. 63–98. Baba, Y., Engle, R.F., Kraft, D., Kroner, K.F., 1990. Multivariate Simultaneous Generalized ARCH. Department of Economics, University of California, San Diego, Mimeo. Barry, F.G., Devereux, M.B., 1995. The 'expansionary fiscal contraction' hypothesis: a neoKeynesian analysis. Oxf. Econ. Pap. 47, 249–264. Barry, F.G., Devereux, M.B., 2003. Expansionary fiscal contraction: a theoretical exploration. J. Macroecon. 25, 1–23. Baxter, M., King, R.G., 1999. Measuring business cycles: approximate band-pass filters for economic time series. Rev. Econ. Stat. 81, 575–593. Bearce, H.D., 2009. EMU: the last stand for the policy convergence hypothesis? J. Eur. Public Policy 16, 582–600. Beetsma, R., Giuliodori, M., Klaassen, F., 2006. Trade spill‐overs of fiscal policy in the European Union: a panel analysis. Econ. Policy 21, 639–687. Bergman, U.M., 2006. Are European business cycles converging? Department of Economics, University of Copenhagen, Research Paper Bertola, G., Drazen, A., 1993. Trigger points and budget cuts: explaining the effects of fiscal austerity. Am. Econ. Rev. 83 (1), 11–26. Blanchard, O.J., 1990. Discussion in F. Giavazzi and M. Pagano 1990. Can severe fiscal contractions be expansionary? A tale of two small European countries. NBER Macroecon. Annu. 5, 111–116. Blanchard, O., Perotti, R., 2002. An empirical characterization of the dynamic effects of changes in government spending and taxes on output. Q. J. Econ. 117 (4), 1329–1368. Bollerslev, T., Wooldridge, J.M., 1992. Quasi-maximum likelihood estimation and inference in dynamic models with time-varying covariances. Econ. Rev. 11, 143–172. Bollerslev, T., Engle, R.F., Wooldridge, J.M., 1988. A capital asset pricing model with timevarying covariances. J. Polit. Econ. 96, 116–131. Boschi, M., Girardi, A., 2011. The contribution of domestic, regional and international factors to Latin America's business cycle. Econ. Model. 28 (3), 1235–1246. Böwer, U., Guillemineau, C., 2006. Determinants of business cycle synchronisation across Euro area countries. ECB Working Paper Series No. 587. Burns, A.F., Mitchell, W.C., 1946. Measuring Business Cycles. National Bureau of Economic Research, New York. Calderon, C., Chong, A., Stein, E., 2007. Trade intensity and business cycle synchronisation: are developing countries any different? J. Int. Econ. 71 (1), 2–21. Candelon, B., Muyskeny, J., Vermeulen, R., 2010. Fiscal policy and monetary integration in Europe: an update. Oxf. Econ. Pap. 62, 323–349. Canova, F., Dellas, H., 1993. Trade interdependence and the international business cycle. J. Int. Econ. 34, 23–47. Cassette, A., Creel, J., Farvaque, E., Paty, S., 2013. Governments under influence: country interactions in discretionary fiscal policy. Econ. Model. 30, 79–89. Cerqueira, P.A., Martins, R., 2011. Is there a political dimension on business cycle synchronisation? Kyklos 64, 329–341. Chen, X., Mills, T.C., 2009. Evaluating growth cycle synchronisation in the EU. Econ. Model. 26 (2), 342–351. Christiano, L., Fitzgerald, T.J., 2003. The bandpass filter. Int. Econ. Rev. 44, 435–465. Clarida, R., Gali, J., Gertler, M., 1999. The science of monetary policy: a new Keynesian perspective. J. Econ. Lit. 37, 1661–1707. Cogan, J.F., Cwik, T., Taylor, J.B., Wieland, V., 2010. New Keynesian versus old Keynesian government spending multipliers. J. Econ. Dyn. Control. 34 (3), 281–295. Colciago, A., Ropele, T., Muscatelli, V.A., Tirelli, P., 2008. The role of fiscal policy in a monetary union: are national automatic stabilizers effective? Rev. Int. Econ. 16 (3), 591–610. Corsetti, G., Meier, A., Müller, G.J., 2010. Cross-border spillovers from fiscal stimulus. Int. J. Cent. Bank. 6 (1), 5–37. Corsetti, G., Meier, A., Müller, G.J., 2012. What determines government spending multipliers? Econ. Policy 27 (72), 521–565. Crespo-Cuaresma, J., Pfaffermayr, M., Amador, O.F., Keppelet, C., 2011. Macroeconomic aspects of European integration: fiscal policy, trade integration and the European business cycle. FIW Research Report, No. 4, March. Crowley, P.M., Schultz, A., 2010. Measuring the intermittent synchronicity of macroeconomic growth in Europe, American Consortium on European Union Studies (ACES). Working Paper No. 2010.1. Darvas, Z., Rose, A.K., Szapáry, G., 2005. Fiscal divergence and business cycle synchronisation: irresponsibility is idiosyncratic (No. w11580). National Bureau of Economic Research. Degiannakis, S., Duffy, D., Filis, G., 2014. Business cycle synchronisation in EU: a timevarying approach. Scott. J. Polit. Econ. 61 (4), 348–370. deHaan, J., Inklaar, R., Jong-a Pin, R., 2008. Will business cycles in the euro area converge? A critical survey of empirical research. J. Econ. Surv. 22, 234–273. Drazen, A., 1990. Can severe fiscal contractions be expansionary? (1990) In: Giavazzi, F., Pagano, M. (Eds.), A Tale of Two Small European Countries. NBER Macroecon. Annu. 5, pp. 117–122. Drazen, A., 2000. Political Economy in Macroeconomics, Princeton University Press; New Jersey. Dufrénot, G., Keddad, B., 2014. Business cycles synchronisation in East Asia: a Markovswitching approach. Econ. Model. 42, 186–197. Engle, R.F., 2002. Dynamic conditional correlation: a simple class of multivariate GARCH models. J. Bus. Econ. Stat. 20, 339–350. Engle, R.F., Kroner, K.F., 1995. Multivariate simultaneous generalized ARCH. Econometric Theory 11, 122–150. Engle, R.F., Granger, C.W.J., Kraft, D., 1986. Combining competing forecasts of inflation using a bivariate ARCH model. J. Econ. Dyn. Control. 8, 151–165. Fatas, A., Mihov, I., 2003. The case of restricting fiscal policy discretion. Q. J. Econ. 118, 1419–1447. Fatas, A., Mihov, I., 2006. The macroeconomics effects of fiscal rules in the US states. J. Public Econ. 90, 101–117. Fatás, A., Mihov, I., 2008. Fiscal discipline, volatility and growth. In: Perry, G., Serven, L., Suescun, R. (Eds.), Fiscal policy, stabilization, and growth: prudence or abstinence? World Bank Publications, Washington D.C. Fatas, A., Mihov, I., 2009. The Euro and fiscal policy. NBER Working Paper No. 14722. National Bureau of Economic Research. Frankel, J.A., Rose, A.K., 1998. The endogeneity of the optimum currency area criteria. Econ. J. 108, 1009–1025. Furceri, D., 2009. Fiscal convergence, business cycle volatility, and growth. Rev. Int. Econ. 17, 615–630. Furceri, D., Karras, G., 2008. Business-cycle synchronization in the EMU. Appl. Econ. 40 (12), 1491–1501. Gali, J., Perotti, R., 2003. Fiscal policy and monetary integration in Europe. Econ. Policy 18, 533–572. Giavazzi, F., Pagano, M., 1990. Can severe fiscal contractions be expansionary? Tales of two small European countries, NBER Macroecon. Annu. 5, 75–122. Giavazzi, F., Pagano, M., 1996. Non-Keynesian effects of fiscal policy changes: international evidence and the Swedish experience. Swed. Econ. Policy Rev. 3 (3), 67–103. Giuliodori, M., Beetsma, R., 2004. What are the spill-overs from fiscal shocks in Europe: An Empirical Analysis. European Central Bank, Working Paper Series, 325. Hodrick, R., Prescott, E., 1997. Postwar U.S. business cycles: an empirical investigation. J. Money, Credit, Bank. 29, 1–16. Ilzetzki, E., Mendoza, E.G., Végh, C.A., 2013. How big (small?) are fiscal multipliers? J. Monet. Econ. 60 (2), 239–254. Imbs, J., 2004. Trade, finance, specialization and synchronisation. Rev. Econ. Stat. 86, 723–734. Imbs, J., 2006. The real effects of financial integration. J. Int. Econ. 68, 296–324. Inklaar, R., Jong-a Pin, R., de Haan, J., 2008. Trade and business cycle synchronisation in OECD countries—a re-examination. Eur. Econ. Rev. 52, 646–666. International Monetary Fund, 2010. World Economic Outlook: Recovery Risk and Rebalancing (October 2010). Kenen, P., 1969. The Theory of Optimum Currency Areas. In: Mundell, R., Swoboda, A. (Eds.), Monetary Problems in the International Economy. University of Chicago Press, Chicago. Kose, M.A., Yi, K.M., 2006. Can the standard international business cycle model explain the relation between trade and comovement? J. Int. Econ. 68 (2), 267–295. Kose, M.A., Prasad, E., Terrones, M., 2003a. How does globalization affect the synchronisation of business cycles? Am. Econ. Rev. 93, 57–62. Kose, M.A., Otrok, C., Whiteman, C., 2003b. International business cycles: world, region and country specific factors. Am. Econ. Rev. 93, 1216–1239. Kose, M.A., Otrok, C., Whiteman, C., 2008. Understanding the evolution of world business cycles. J. Int. Econ. 75 (1), 110–130. Krugman, P., 2012. End this depression now! WW Norton & Company, New York. Lane, P.R., 2003. The cyclical behaviour of fiscal policy: evidence from the OECD. J. Public Econ. 87 (12), 2661–2675. Lane, P., 2006. The real effects of European monetary union. J. Econ. Perspect. 20, 47–66. Lane, P., 2012. The European sovereign debt crisis. J. Econ. Perspect. 26 (3), 29–68. Leser, C.E.V., 1961. A simple method of trend construction. J. R. Stat. Soc. Ser. B 91–107. Lütkepohl, H., 2007. New Introduction to Multiple Time Series Analysis. Springer Verlag, New York. McDermott, C.J., Westcott, R.F., 1996. An empirical analysis of fiscal adjustments. IMF Staff. Pap. 43, 725–753. McKinnon, R.I., 1963. Optimum currency areas. Am. Econ. Rev. 53, 717–725. Mertens, K., Rav, M.O., 2012. Empirical evidence on the aggregate effects of anticipated and unanticipated US tax policy shocks. Am. Econ. J. Econ. Policy 4 (2), 145–181. Mundell, R.A., 1961. A theory of optimum currency areas. Am. Econ. Rev. 51, 657–665. Morgan, D.P., Rime, B., Strahan, P.E., 2004. Bank integration and state business cycles. Q. J. Econ. 119, 1555–1585. Papageorgiou, T., Michaelides, G., Milios, J.G., 2010. 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PY - 2016/1

Y1 - 2016/1

N2 - The present study adds to the literature on the impact of fiscal policy on business cycle synchronisation. Specifically, it investigates the effects of fiscal policy on business cycle synchronisation between 10 EMU member-countries and the aggregate EMU12-wide business cycle, using a time-varying framework. The findings suggest that fiscal policy has important effects on business cycle synchronisation for all 10 EMU countries. Hence, fiscal policy is shown to have the potential to be supportive of macroeconomic stabilisation in the Eurozone. However, the evidence reveals that none of the countries under examination consistently uses fiscal policy to promote business cycle synchronisation.

AB - The present study adds to the literature on the impact of fiscal policy on business cycle synchronisation. Specifically, it investigates the effects of fiscal policy on business cycle synchronisation between 10 EMU member-countries and the aggregate EMU12-wide business cycle, using a time-varying framework. The findings suggest that fiscal policy has important effects on business cycle synchronisation for all 10 EMU countries. Hence, fiscal policy is shown to have the potential to be supportive of macroeconomic stabilisation in the Eurozone. However, the evidence reveals that none of the countries under examination consistently uses fiscal policy to promote business cycle synchronisation.

KW - Time-varying correlation

KW - EMU business cycle

KW - Business cycle synchronisation

KW - Fiscal policy

KW - Diag-BEKK model

U2 - 10.1016/j.econmod.2015.09.035

DO - 10.1016/j.econmod.2015.09.035

M3 - Article

VL - 52

SP - 551

EP - 563

IS - B

ER -