Working Paper: CEPR ID: DP2242
Authors: Michael J. Artis; Hansmartin Krolzig; Juan Toro
Abstract: This paper deals with the existence and identification of a common European Growth Cycle. It has recently been argued that the formation of a monetary union creates in itself a tendency for business cycle symmetry to emerge. If this holds for the European monetary Union and the quasi-union of the Exchange Rate Mechanism of the European Monetary System, then we might already expect to be able to find an emergent 'European cycle' which will become more dominant in future years. Univariate Markov switching autoregressions (MS-AR) are used for individual countries in order to detect changes in the mean growth rate of industrial production. The smoothed probabilities obtained from these models give support to the possibility of inferring a common European cycle by jointly modelling the industrial production indices of the nine countries under study. An MS-VAR model is then used to identify the common cycle in Europe and the results confirm the existence of such a cycle. The European business cycle is dated on the basis of the regime probabilities. Two further issues are investigated. First we investigate the contribution of the European Business Cycle to the individual country cycles. Second, we undertake an impulse response analysis where we investigate the response of each individual country to European expansions and recessions. We analyze the response of industrial production in each country due to a change in regime. We focus mainly on two types of shocks, the response of industrial production in individual countries due to a European recession and the effect of an expansionary period in Europe. An appendix includes a similar analysis for GDP.
Keywords: International business cycles; European Union; Markov switching; Structural breaks; Time series analysis
JEL Codes: C32; E32; F43; F47
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Response of industrial production (L69) | Varies by country (O57) |
| Formation of a monetary union (F36) | Increased tendency for business cycle symmetry among member countries (F44) |
| Common European business cycle (F44) | Individual country cycles (F44) |
| European business cycle (F44) | Response of industrial production in each country (E23) |
| European business cycle (F44) | Industrial production particularly during recessions and expansions (E23) |