Abstract
Most studies of business cycle synchronization in the EMU identify a core set of counties with high synchronization and a periphery set of countries with low synchronization. Using a structural VAR with model uncertainty, we identify spillover effects from shocks that originate in the United States, the EMU, and the rest of the world to test whether external influences can explain the existence of the core and periphery. Most countries typically found in the core respond to external spillovers in similar ways, leading to more synchronized business cycles. The response to external influences in the countries traditionally found in the periphery, on the other hand, help explain their exclusion from the core.
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Notes
Variables ordered early in the VAR are assumed to have no contemporaneous effects on the variables ordered below it. Variables listed below are assumed to contemporaneously affect those variables ordered above them.
We have also run this experiment using a rest of the world variable excluding European countries. The effects of United States and EMU shocks on individual members are similar across specifications. The effects of rest of the world shocks, on the other hand, are smaller and less significant in the specification excluding European countries. These results are available upon request.
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Jones, J., Collins, N. & Sribnick, L. External Influences on Business Cycle Synchronization in the Euro Area. Int Adv Econ Res 18, 28–39 (2012). https://doi.org/10.1007/s11294-011-9339-7
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DOI: https://doi.org/10.1007/s11294-011-9339-7