Business cycle synchronization within the European Union: A wavelet cohesion approach

TL;DR

This paper uses wavelet cohesion techniques to analyze the dynamic synchronization of business cycles among European Union countries, revealing increased co-movement post-accession and potential effects of currency union participation.

Contribution

It introduces a wavelet cohesion approach with time-varying weights to study business cycle synchronization, offering a novel perspective beyond traditional time-domain models.

Findings

Increased synchronization of Visegrad countries with the EU after accession.

Currency union participation may enhance business cycle co-movement.

High long-term synchronization among Visegrad Four and Southern European countries with core EU countries.

Abstract

In this paper, we map the process of business cycle synchronization across the European Union. We study this synchronization by applying wavelet techniques, particularly the cohesion measure with time-varying weights. This novel approach allows us to study the dynamic relationship among selected countries from a different perspective than the usual time-domain models. Analyzing monthly data from 1990 to 2014, we show an increasing co-movement of the Visegrad countries with the European Union after the countries began preparing for the accession to the European Union. With particular focus on the Visegrad countries we show that participation in a currency union possibly increases the co-movement. Furthermore, we find a high degree of synchronization in long-term horizons by analyzing the Visegrad Four and Southern European countries' synchronization with the core countries of the European Union.