After East Asian financial crisis in 1997 and European monetary unification in 1999, if it is suitable of establishing the Asian common monetary area becomes the hot topic. The precondition of establishing the monetary policy cooperation depends on the synchronization of various countries¡¦ business cycle co-movement. And the trade is the connector among the countries. Trade linkages seemed to have an influence on business cycle co-movement. Countries with close international trade link are more likely to be members of an optimal currency area. According to the theoretical literature, the impact of trade integration on business cycle correlation may go either way. On the one hand, if trade occurs mainly by Heckscher-Ollin or is of the Ricardian type, higher specialization would induce the industrial structures of the trading countries to diverge, resulting in less synchronized movements of business cycle. In contrast, if trade occurs mainly through intra-industry trade, specialization does not necessarily lead to less synchronized. In summary, the total effect of trade intensity on cycle correlation is theoretically ambiguous and poses a question that could only be solved empirically. The volume of trade in East Asia has increased continuously. This paper extends the study of Frankel and Rose (1998) to analyze the impact of trade integration on business cycle correlation and intra-industry trade by using SITC data and other macroeconomic factors. Moreover, using two-stage estimation and instruments to take into account the fact that trade intensity itself may be endogenous. Then, we use panel data to estimate our equation. By gathering annual information of 10 East Asian countries from 1987 to 2005, we found that higher trade integration leads higher business cycle synchronization. To sum up, intra-industry trade is the process of establishing East Asian common monetary area.

Using the dynamic conditional correlation (DCC) model due to Engle (2002), we estimate time varying correlations of quarterly real GDP growth among the G7 countries. In general, we find that rather heterogeneous patterns of international synchronization exist during US recessions. During the 2007-2009 recession, however, international co-movement increased substantially. (authors' abstract)

Countries participating in a common currency area increase their integration within the area. This paper investigates the impact common currency areas have for economic integration with economies of different characteristic outside the area. Results for a common currency group compares to a sovereign currency group. The common currency group consists of three countries who have adopted the euro, while the sovereign currency group consist of three European countries with sovereign currencies. The level of economic integration is examined towards three different economies; European drivers, global markets and emerging markets. The period ranges from 1993M01 to 2017M09 and includes industrial production indices and stock market indices. Economic integration is studied through a DCC-EGARCH model, on both aggregated and time-dependent level, which yield correlations. In comparison to previous studies, this paper also applies a cross-quantilogram method to examine the impact of different market conditions have on the correlations. Higher correlations for the common currency group than for the sovereign currency group do exist with the European drivers and the global countries. With the emerging markets such pattern is not found, instead low correlations are mainly examined. Besides the correlation with the emerging countries, the results indicate membership in a common currency area, in this case the EMU, to increase the economic integration. Overall, highest levels of correlation are found with the European drivers, followed by the US as a global economy, corresponding with the importance of homogeneity for high economic integration. Due to no conclusive change in correlations during the euro implementation, membership in a common currency area per se does not increase economic integration. However, a common currency area with a strong currency do along with other characteristics influence the economic integration. We find evidence that market regimes have an impact on economic integration. Adverse market conditions overall seem to influence the integration in a higher degree than normal or good conditions. The results indicate that the adverse conditions increase the economic integration, this is in particularly seen for the common currency countries correlation with the European drivers and the US.

We analyse the dynamics of the standard deviation of demand and supply shocks as well as of the demand component of GDP across countries in the European Monetary Union (EMU). This analysis allows us to evaluate the patterns of cyclical comovement in EMU and compare them the cyclical performance of the new members of the EU and other OECD countries. We make use of sigma-convergence methods to identify synchronization patterns in business cycles. The Eurozone has converged to a stable lower level of dispersion across business cycles during the end of the 80s and the beginning of the 90s. The new EU members have also experienced a strong pattern of convergence from 1998 to 2005, when a strong divergence trend appears. An enlargement of the EMU to 22 members would not significantly decrease its optimality as a currency area. There is evidence for some Europe-specific characteristics as compared to global comovements in business cycles. (authors' abstract)

This paper investigates how the introduce of single currency influence on the synchronization of business cycles in Central Eastern European Countries. The Hodrick-Prescott filter is applied to extract the cyclical component of real GDP for fifteen European countries and the Vector Autoregression models are applied to further investigate the influence of fiscal policy on regional economies. A database of quarterly real GDP for business cycles and quarterly current account for fiscal variables for the period: 1995Q1-2019Q4 is constructed. The main results of the study can be summarized as follows. The establishment of Economy Monetary Union has significantly increased the level of co-movement across euro area member states. There is a high degree of synchronization of business cycles in core countries than periphery countries after the introduce of common currency. For CEEC-7 including non-Eurozone countries (Czech Republic, Hungary, Poland) and Eurozone countries (Estonia, Germany, Slovakia, Slovenia), clusters in correlation exist because their GDP reacts differently to the fiscal shocks especially after the global financial crisis and ongoing euro area crisis. Key words business cycle synchronization; Economic integration; Fiscal policy; VAR

The literature on nexus between trade and business cycle synchronization have provided mixed and weak evidence of the effect of trade on business cycle synchronization as a result of lack of value-added bilateral trade data which provides solution for overestimation or underestimation of shock exposure when using gross trade data. Also, due to limited data on sectoral bilateral value-added trade, the literature has not been able to pinpoint the sectors where synchronization is necessary in order to economically direct all effort to these sectors in forging economic integration. The paper uses value-added trade data to examine the impact of trade on business cycle synchronization at the aggregate level and sector level and find a highly significant and highly positive effect of trade on the aggregate level. Estimates for agriculture, manufacturing, construction, total business, electricity gas and sewer, and other service sectors yield a positive significant effect in the service sector, indicating that attention should be focus on the service and business sector when integrating economically.In this paper we examine output cycle synchronization patterns of the countries that joined the Eurozone later and countries that are in preparation or committed to join in relation to the original Eurozone members. We analysis this in the contest of before, during and recovery periods of the global financial crisis investigate the differences in the patterns of synchronization for late and future members of the Eurozone. For more understanding, we examine the pattern on disaggregate level using data for agricultural, manufacturing, construction, utility, total business and other services sectors from 1995-2015. Also, we examine the importance of trade on output synchronization both on the aggregate and disaggregate level using System GMM which not only solves the problem of endogeneity, but it estimates the persistence of business cycle synchronization efficiently. The result provides evidence of a positive persistence; however, synchronization pattern differs between late and future member states. Also, the financial crisis had a negative effect on synchronization in the European sub region as result the difference in the response by member states. The result shows a weak evidence of the importance of trade as a channel of synchronization. Even though previous studies have provided evidence improvement in UK and the Eurozone output comovement, Brexit came to pass. This has questioned the potency of the Enlargement of the Eurozone Initiative. This paper reexamines the degree of business cycle synchronization between the Euro area countries and United Kingdom in attempt to find an economic reason for Brexit. We also examine if the disaggregate economy have share similar pattern as the aggregated economy using the output synchronization in the agricultural, manufacturing, constructions, utility, total business and other service sectors between the euro area countries and United Kingdom. Using valued-added trade data between 1995 and 2015 from WTO-TiVA database we further examine effect of trade (sectoral trade) on the output (sectoral output) synchronization. Furthermore, we analyze the same questions in the contest of before and after the global financial crisis. The result show that the UK-EMU trade channel is no important to the output cycles synchronization. Also, due the unstable pattern or persistence of UK-EMU synchronization the EMU will have little effect from the Brexit if there exit one.

This paper investigates a new category of influential factors on business cycle synchronization (BCS), so far hardly regarded in the BCS literature: It provides an empirical assessment of the impact of macroeconomic imbalances, as monitored by the European Commission by the scoreboard indicators since 2011, on BCS in the Euozone. We use a quarterly data set covering the period 2002-2012 and estimate the direct and indirect effects of macroeconomic imbalances in the pre- and post-crisis period in a simultaneous equations model. Business cycle correlation between EA members is measured by the recently proposed dynamic conditional correlation of Engle 2002 which can better identify synchronous and asynchronous behaviour of BC than the commonly used measures. We find that appearing differences between EA members in the current account, in government deficit and public debt, in private debt and unit labor cost developments have reduced BCS in the EA, even more in the post-crisis period than before. Moreover, these explanatory factors of BCS, generally reinforce each other and are also influenced by other critical macro imbalances. Since BCS is essential in a monetary union, this paper provides clear support that a stronger, common economic governance would be important for the functioning and survival of the Eurozone. (authors' abstract) / Series: Department of Economics Working Paper Series

The dissertation is mainly made up of three empirical theses on the Optimum Currency Area theory, business cycle synchronization, and intra-industry trade. The second chapter conducts an empirical test into the theory of Optimum Currency Area. I investigate the feasibility of creating a currency union in East Asia by examining the dominance and symmetry of macroeconomic shocks. Relying on a series of structural Vector Autoregressive models with long-run and block exogeneity restrictions, I identify a variety of macroeconomic disturbances in eleven East Asian economies. To examine the nature of the disturbances, I look into the forecast error variance decomposition, correlation of disturbances, size of shocks, and speed of adjustments. Based on both statistical analysis and economic comparison, it is found that two groups of economies are subject to dominant and symmetrical domestic supply shocks, and that the two groups respond quickly to moderate-sized shocks. Therefore, it is economically feasible for the two groups of economies to foster common currency zones. The third chapter investigates the different effects of intra- and inter-industry trade on business cycle synchronization, controlling for financial market linkage and monetary policy making. The chapter is the first attempt to use intra- and inter-industry trade simultaneously in Instrument Variable estimations. The evidence in my paper is supportive that intra-industry trade increases business cycle synchronization, while inter-industry trade brings about divergence of cycles. The findings imply that country pairs with higher intra-industry trade intensity are more likely to experience synchronized business cycles and are more feasible to join a monetary union. My results also show that financial integration and monetary policy coordination provide no explanation for synchronization when industry-level trade are accounted for. The fourth chapter extends the third chapter and explores how the characteristics of global trade network influence intra-industry trade. Borrowing the concept of structural equivalence, the similarity of two countries’ aggregate trade relations with other countries, from the social network analysis, this study incorporates this measure of trade network to the augmented gravity model of intra-industry trade. I build up two fixed effects models to analyze intra-industry trade in the raw material and final product sectors among 182 countries from 1962 through 2000. Structural equivalence promotes intra-industry trade flows in the final product sector, but it does not influence intra-industry trade in the crude material sector. Moreover, structural equivalence has been increasingly important in boosting intra-industry trade over time. / Graduate / 0508

Previous studies have discounted important factors and indirect channels that might contribute to business cycle synchronization (BSC) in the EU. We estimate the effects of market integration and economic policy coordination on bilateral business cycle correlations over the period 1995-2012 using a simultaneous equations model that takes into accounts both the endogenous relationships and unveils direct and indirect effects. The results suggest that (i) trade and FDI have a pronounced positive effect on BCS, particularly between incumbent and new EU members. (ii) Rising specialization does not decouple business cycles. (iii) The decline of income disparities in EU27 contributes to BCS, as converging countries develop stronger trade and FDI linkages. (iv) There is strong evidence that poor fiscal discipline of EU members is a major impediment of business cycle synchronization. (v) The same argument holds true for exchange rate fluctuations that hinder BCS, particularly in EU15. Since BCS is a fundamental prerequisite and objective in an effective monetary union, the EU has to promote market integration and strengthen the common setting of economic policies.

This paper examines the synchronization of business cycles across the G7 countries during US recessions since the 1870's. Using a dynamic measure of business cycle synchronization, results depend on the globalisation period under consideration. On average, US recessions have significantly positive effects on business cycle co-movements only in the period following the breakdown of the Bretton Woods system of fixed exchange rates, while strongly decoupling effects among the G7 economies are documented during recessions that occurred under the classical Gold Standard. During the 2007-2009 recession, business cycles co-movements increased to unprecedented levels. (author's abstract) / Series: Department of Economics Working Paper Series