The transmission of business cycles implications for EMU enlargement

We show that countries characterized by large bilateral trade and financial flows tend to have more correlated business cycles. However, we also find that countries with divergent fiscal policies and highly regulated labour markets are subject to idiosyncratic cycles. Applying these results to the n...

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Bibliographic Details
Published in:The economics of transition 2008-01, Vol.16 (3), p.559-582
Main Authors: Artis, Michael J, Fidrmuc, Jarko, Scharler, Johann
Format: Article
Language:English
Subjects:
Business cycles
Economic and Monetary Union
Economic integration
EU enlargement
Europe
Fiscal policy
Foreign direct investment
Labour market flexibility
Optimal currency area
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Summary:We show that countries characterized by large bilateral trade and financial flows tend to have more correlated business cycles. However, we also find that countries with divergent fiscal policies and highly regulated labour markets are subject to idiosyncratic cycles. Applying these results to the new member states of the EU weakens the optimistic view towards the monetary integration of these countries into the euro area, which is frequently found in the literature. Although our results suggest that extensive trade and financial linkages are likely to result in further increases in business cycle correlation, an increase in labour market regulation and the pursuit of national fiscal policies may result in a counteracting effect. Reprinted by permission of Blackwell Publishers
ISSN:0967-0750
DOI:10.1111/j.1468-0351.2008.00325.x