The transmission of business cycles
Implications for EMU enlargement

Authors: Artis, Michael J.; Fidrmuc, Jarko; Scharler, Johann

Source: Economics of Transition, Volume 16, Number 3, July 2008 , pp. 559-582(24)

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Abstract:

We show that countries characterized by large bilateral trade and financial flows tend to have more correlated business cycles. However, we also find that countries with divergent fiscal policies and highly regulated labour markets are subject to idiosyncratic cycles. Applying these results to the new member states of the EU weakens the optimistic view towards the monetary integration of these countries into the euro area, which is frequently found in the literature. Although our results suggest that extensive trade and financial linkages are likely to result in further increases in business cycle correlation, an increase in labour market regulation and the pursuit of national fiscal policies may result in a counteracting effect.

Keywords: E32; F15; J50; optimum currency area theory; trade; foreign direct investment; deviation business cycle; labour market rigidities

Document Type: Research article

DOI: http://dx.doi.org/10.1111/j.1468-0351.2008.00325.x

Affiliations: 1: Department of Economics, University of Linz, Linz, Austria., Email: johann.scharler@jku.at

Publication date: 2008-07-01