Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/264778 
Year of Publication: 
2013
Series/Report no.: 
Working Paper No. 186
Publisher: 
Oesterreichische Nationalbank (OeNB), Vienna
Abstract: 
We examine whether the introduction of the euro had a significantly positive impact on the synchronization of business cycles among members of Economic and Monetary Union (EMU) which might arise due to the lack of country-specific monetary policy shocks in the euro area. Empirical evidence on this relationship is rare so far and su ers from methodical weaknesses, such as the absence of time variability, which is crucial for addressing this issue. Using a synchronization index that is constructed on a year-by-year basis (1993-2011), we uncover a strong and robust empirical finding: the adoption of the euro has significantly increased the correlation of member countries' business cycles above and beyond the effect of higher trade integration. Thus, our results substantially strengthen the conclusion by Frankel & Rose (1998), i.e. a country is more likely to satisfy the criteria for entry into a currency union ex post rather than ex ante. Remarkably, however, this reasoning is even verified when controlling for the effect of increased trade linkages implied by entering a currency union.
Subjects: 
Business cycles
EMU
endogeneity
optimum currency areas
JEL: 
E02
E32
E58
F15
F33
Document Type: 
Working Paper

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