Business cycle coherence and OCA endogeneity testing during the integration period in the European Union

Abstract

The paper deals with assessing the EU from the new optimum currency area theory perspective. It focuses on measuring of the business cycle coherence applying the composite indicators of output gap similarity and synchronicity. Static as well as dynamic business cycle analysis is applied in the paper. In addition, the OCA endogeneity hypothesis is tested based on results of the business cycle coherence analysis. The results show high general coherence of the business cycles across the EU countries in terms of synchronicity measures. Detailed analysis of the output gap similarity indicates differences in the scale of cyclical deviations and impact of shocks in individual countries in the EU. Also the ability to cope with the crisis as a kind of external shock differs in the EU countries. The results do not provide a clear evidence of the OCA endogeneity hypothesis related to the Euro area member and non-member countries.

Keywords

• business cycle coherence
• Euro area
• global financial crisis
• optimum currency area theory