Recent Patterns of Economic Alignment in the European (Monetary) Union

This paper studies the process of business cycle synchronization in the European Union and the euro area. As our baseline methodology we adopt rolling window correlation coefficients of various economic indicators, observed since 2000. Among the indicators, we distinguish between real economic indicators, like the real GDP growth and unemployment, and nominal indicators, like inflation and government budget. Given the direct implication of this kind of analysis for the common monetary policy of the European Central Bank (ECB), special attention is paid to the pattern of business cycle synchronization in the core and peripheral members of the euro area. Our analysis of quarterly data covering the first two decades of the euro area shows that there was a certain synchronization tendency in the first years of the common currency. However, the European debt crisis halted the economic integration within the European Union and—even more so—within the euro area. Since the ECB can to a large extent intervene only with “one-size-fits-all” monetary policy instruments, this renders increasingly cumbersome the conduct of stabilisation policies within the euro area.

Bilateral Trade Intensity and Business Cycle Synchronization Nexus: An Analysis from Major Trading Partners of Pakistan

The existing research on the relationship between bilateral trade and business cycle synchronization (BCS) is limited in the context of developing countries like Pakistan. Theoretically, bilateral trade can lead to convergence as well as divergence of business cycles depending upon prevailing economic conditions in a country. The present study is an attempt to explore the relationship between bilateral trade and business cycle synchronization in Pakistan. For empirical analysis, data of six major trading partners of Pakistan is collected for the period 1991-2017 and multidimensional fixed effect estimation technique has been used. The results of the study show that bilateral trade has significant and positive impact on BCS. The coordination of fiscal and monetary policies appear to be significant determinants of GDP synchronization. These results have strong implications for policymakers and practitioners for formulating and implementing policies for Pakistan to get the maximum benefits of BCS.

Have Business Cycles Become More Synchronous After NAFTA?

Trade agreements do not necessitate business cycle comovement. Focusing on NAFTA, we investigate whether business cycles in Canada, Mexico, and the US have become more synchronous after the landmark trade agreement came into effect in 1994. To this end, using the newly-developed Hamilton filter, we decompose the real GDPs of the three countries to derive their business cycle components; then, we conduct time-difference analyses, which illuminate correlations at different time intervals, to study business cycle synchronization. We find that business cycles in Mexico and the US have become positively correlated after NAFTA—they were weakly and negatively correlated during the pre-NAFTA period. Contrastingly, correlations amongst the US and Canadian business cycles have weakened during the post-NAFTA period; nevertheless, these two countries' business cycles continue to be tightly and positively correlated. The oft-used Hodrick-Prescott filter is utilized to confirm the robustness of the results—the two filters lead to similar conclusions.

Fragmentation of International Production and Business Cycle Synchronization: New Evidence pre and during Global Financial Crises

Understanding the link between the fragmentation of international production (FIP) and business cycle synchronization (BCS) is crucial because it affects the world economic stability and hence hampers the sustainability in world trade, world production, and the world supply chain. Following that, this paper investigates the effects of fragmentation in an international production (FIP) on business cycle synchronization (BCS) amongst 38 countries (29 OECD and nine non-OECD countries) for two different periods; pre-crisis (2003–2007) and during the crisis period (2008–2012). This study uses a dynamic panel system GMM estimation in analyzing the effect of FIP on BSC by controlling other explanatory variables, namely, trade linkages and financial openness. Unlike many previous results, the main findings reveal that FIP positively and significantly affects BCS during a crisis period. However, it shows an insignificant effect during the normal period. In other words, FIP would amplify the synchronization of output downfall during the crisis period. Trade linkages have a negative and significant relationship with BCS in both periods, whereas financial openness has a negative and significant relationship with BCS during the normal period. The study suggests that selective measures have to be undertaken in implementing FIP during the crisis period to reduce the negative impact of BCS. Increasing trade and financial activities, on the other hand, would be beneficial for the countries as they would reduce the negative effect of BCS during the crisis period.

The Trade-Comovement Puzzle

Standard international transmission mechanism of productivity shocks predicts a weak endogenous linkage between trade and business cycle synchronization: a problem known as the trade-comovement puzzle. We provide the foundational analysis of the puzzle, pointing to three natural candidate resolutions: (i) financial market frictions, (ii) Greenwood-Hercowitz-Huffman preferences, and (iii) dynamic trade elasticity that is low in the short run but high in the long run. We show the effects of each of these candidate resolutions analytically and evaluate them quantitatively. We find that while (i) and (ii) fall short of the data, (iii) goes a long way toward resolving the puzzle. (JEL E32, F14, F44)