EMU Membership and Business Cycle Phases in Europe: Markov-Switching VAR Analysis

Beine, Michel; Candelon, Bertrand; Sekkat, Khalid

doi:2003.18.1.214

Journal of Economic Integration 2003 March;18(1) :214-242.
DOI: https://doi.org/10.11130/jei.2003.18.1.214

EMU Membership and Business Cycle Phases in Europe: Markov-Switching VAR Analysis

Michel Beine, Bertrand Candelon, Khalid Sekkat

Université of Lille 2 and Université Libre de Bruxelles
University Maastricht
Univervité Libre de Bruxelles and European Commission

ABSTRACT

Most empirical applications of the OCA approach based on asymmetric shocks have failed to account for the credibility aspects that play an important role in deciding to join the EMU from the EMS or the EMS-BIS. In this paper, we tackle this problem by relying on a regime switching approach that characterizes the position of each economy in its business cycle. Then, using desynchronisation indices based on a non parametric approach, we measure the amplitude and the duration of divergence in the business cycles in order to assess the potential stabilization cost induced by the European economic and monetary union.

Keywords: Business cycle | OCA | Switching regines

REFERENCE

1.	Bayoumi, T. and B. Eichengreen (1993), "Shocking Aspects of European Monetary Unification", in F. Torres and G. Giavazzi (eds), "Adjustment and Growth in the European Monetary Union", pp. 193-221.

2.	Bayoumi, T. and B. Eichengreen (1997), "Ever closer to Heaven : An OCA Index for European Countries", European Economic Review,41, pp.761-770.

3.	Beine, M., B. Candelon and A. Hecq (2000), "Assessing a Perfect European Optimum Currency Area: a Common Cycles Approach", Empirica, 27, pp.115-132.