Uncertainty and business cycle synchronization in Europe

ABSTRACT

We assess empirically the role that uncertainty plays as a determinant of business cycle synchronization dynamics in the European Monetary Union. Using a time-varying measure of business cycle synchronization and Bayesian model averaging methods, we find that increase in uncertainty tends to robustly predict desynchronization, in particular for countries whose business cycles are not in line with those of the rest of the monetary union.

KEYWORDS:

• Business cycle synchronization
• uncertainty
• European monetary union
• Bayesian model averaging

JEL CLASSIFICATIONS:

• F45
• F44
• C33

Acknowledgements

The author would like to thank three anonymous referees for helpful comments. Financial support from the Oesterreichische Nationalbank’s Jubiläumsfond (grant number 16736) and the European Social Fund (project No 09.3.3-LMT-K-712-01-123) under a grant agreement with the Research Council of Lithuania (LMTLT) is gratefully acknowledged.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ For a recent account of the econometric literature of optimum currency areas and business cycle synchronization, see Campos, Fidrmuc, and Korhonen (2019).

² The data on the uncertainty index are available for 15 out of the 19 countries that currently part of EMU, so the regressions do not include observations for Cyprus, Estonia, Malta and Luxembourg.

³ Approaches based on hyperprior specifications for $g$ have also been put forward by Liang et al. (2008); Feldkircher and Zeugner (2009); Ley and Steel (2012).

Additional information

Funding

This work was supported by the European Social Fund [09.3.3-LMT-K-712-01-123]; Oesterreichische Nationalbank [16736].