Working Paper: CEPR ID: DP1191
Authors: Michael Artis; Wenda Zhang
Abstract: Successful fixed exchange rate systems impose policy disciplines which are likely to lead to conformity in the business cycles of the participating countries. This conjecture is borne out in the present paper by the evidence adduced in it that the business cycle affiliation of ERM member countries has shifted from the United States to Germany since the formation of the ERM. This effect is bolstered by growing links in trade and finance between the European countries. The United Kingdom is conspicuous among these in that its business cycle affiliation did not change.
Keywords: business cycles; ERM
JEL Codes: E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Formation of the ERM (F33) | Shift in business cycle affiliation from the U.S. to Germany (F44) |
| Formation of the ERM (F33) | Increased synchronization of business cycles among member countries (F44) |
| Linkages between ERM countries' business cycles (F44) | Strengthening over time (D25) |
| Business cycle synchronization among ERM countries (F44) | Decrease in synchronization with the U.S. cycle (F44) |
| UK's short-term ERM membership (F33) | No significant change in cycle affiliation (E32) |