Abstract
This paper develops a methodology to investigate which shocks drive asynchrony of business cycles. It unites two strands of literature, those on common features and on structural VAR analysis. In particular, a lack of a common cycle between two GDPs can be traced back to at least one shock with non-collinear structural impulse responses. We apply a Wald test to the collinearity hypothesis. Empirical results on the eurozone reveal that differences in the business cycles in several peripheral countries compared to a eurozone core are triggered mainly by local shocks. Depending on the country, real or nominal shocks turn out to play a more important role.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
It may be disputable to include Italy given the current situation of the public finances and their perception in the financial markets in recent years. However, Italy does not deviate from the pattern of a common cycle with Germany. This also applies to the other four countries according to LR tests on a common cycle. Thus, we can empirically confirm the findings of Carvalho and Harvey (2005).
The same qualitative results are obtained when conducting the LR test for common cycles in bivariate systems only consisting of \(y_{\mathrm{core},t}\) and \(y_{\mathrm{pc},t}\).
Of course, this theoretical framework is not meant to provide a realistic description of the economy, but rather to fix ideas on the broad interpretation of our empirical results. By the same token, the terms “demand” and “nominal” as well as “supply” and “real” are used synonymously, even if they are not necessarily identical with regard to more detailed models.
References
Ahlborn M, Wortmann M (2018) The core-periphery pattern of European business cycles: a fuzzy clustering approach. J Macroecon 55:12–27
Ahmed S, Ickes BW, Wang P, Yoo BS (1993) International business cycles. Am Econ Rev 83(3):335–59
Artis MJ (2003) Reflections on the optimal currency area (OCA) criteria in the light of EMU. Int J Finance Econ 8:297–307
Bayoumi T, Eichengreen B (1994) One money or many? Analyzing the prospects for monetary unification in various parts of the world. Princet Stud Int Finance 74:1–44
Bayoumi T, Eichengreen B (1997) Ever closer to heaven? An optimum-currency area index for European countries. Eur Econ Rev 41:761–770
Beine M, Candelon B, Hecq A (2000) Assessing a perfect European optimum currency area: a common cycles approach. Empirica 27(2):115–132
Benkwitz A, Lütkepohl H, Neumann M (2000) Problems related to confidence intervals for impulse responses of autoregressive processes. Econom Rev 19:69–103
Blanchard O, Quah D (1989) The dynamic effects of aggregate demand and supply disturbances. Am Econ Rev 79:655–673
Breitung J, Candelon B (2001) Is there a common European business cycle? New insights from a frequency domain analysis. Vierteljahrshefte zur Wirtschaftsforschung / Q J Econ Res 70(3):331–338
Camacho M, Perez-Quiros G, Saiz L (2006) Are European business cycles close enough to be just one? J Econ Dyn Control 30(9–10):1687–1706
Canova F, Ciccarelli M (2012) Clubmed? Cyclical fluctuations in the Mediterranean basin. J Int Econ 88:162–175
Canova F, Ciccarelli M, Ortega E (2012) Do institutional changes affect business cycles? Evidence from Europe. J Econ Dyn Control 36(10):1520–1533
Canova F, de Nicoló G (2003) On the sources of business cycles in the G-7. J Int Econ 59:77–100
Carvalho VM, Harvey AC (2005) Convergence in the trends and cycles of euro-zone income. J Appl Econ 20(2):275–289
Carvalho VM, Harvey A, Trimbur T (2007) A note on common cycles, common trends, and convergence. J Bus Econ Stat 25:12–20
Engle RF, Kozicki S (1993) Testing for common features. J Bus Econ Stat 11:369–380
Greene WH (2008) Econometric analysis, 6th edn. Prentice Hall, Upper Saddle River
Inoue A, Kilian L (2016) Joint confidence sets for structural impulse responses. J Econom 192:421–432
Karadimitropoulou A, León-Ledesma M (2013) World, country, and sector factors in international business cycles. J Econ Dyn Control 37(12):2913–2927
Kim Y, Chow HK (2003) Optimum currency area in Europe: an alternative assessment. Econ Lett 81:297–304
Koopman SJ, Azevedo JVE (2008) Measuring synchronization and convergence of business cycles for the Euro area, UK and US. Oxf Bull Econ Stat 70(1):23–51
Kose AM, Otrok C, Whiteman CH (2008) Understanding the evolution of world business cycles. J Int Econ 75:110–130
Kwark N-S (1999) Sources of international business fluctuations: Country-specific shocks or worldwide shocks? J Int Econ 48(2):367–385
Luginbuhl R, Koopman SJ (2004) Convergence in European GDP series: a multivariate common converging trend-cycle decomposition. J Appl Econ 19(5):611–636
Lütkepohl H (1996) Testing for nonzero impulse responses in vector autoregressive processes. J Stat Plan Inference 50:1–20
Lütkepohl H (2005) New introduction to multiple time series analysis. Springer, Berlin
Lütkepohl H, Burda MM (1997) Modified Wald tests under nonregular conditions. J Econom 78(2):315–332
Lütkepohl H, Poskitt DS (1991) Estimating orthogonal impulse responses vector autoregressive models. Econ Theory 7:487–496
Stock JH, Watson MW (2005) Understanding changes in international business cycle dynamics. J Eur Econ Assoc 3:968–1006
Vahid F, Engle RF (1993) Common trends and common cycles. J Appl Econ 8:341–360
Vahid F, Issler JV (2002) The importance of common cyclical features in VAR analysis: a Monte-Carlo study. J Econom 109:341–363
Acknowledgements
We are grateful to the participants of the economics research seminar at the Westfälische Wilhelms-Universität Münster. The research was supported by the Deutsche Forschungsgemeinschaft (DFG) through the SFB 884 “Political Economy of Reforms”. Part of the research was done while the first author was visiting the Humboldt Universität zu Berlin. He thanks the Humboldt Universität for its hospitality.
Author information
Authors and Affiliations
Corresponding author
Ethics declarations
Conflict of interest
Both authors, Carsten Trenkler and Enzo Weber, declare that they have no conflict of interest.
Human and animal rights
This article does not contain any studies with human participants or animals performed by any of the authors.
Rights and permissions
About this article
Cite this article
Trenkler, C., Weber, E. Identifying shocks to business cycles with asynchronous propagation. Empir Econ 58, 1815–1836 (2020). https://doi.org/10.1007/s00181-018-1563-z
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s00181-018-1563-z