PIIGS in and out of sync: the changing face of financial business cycle synchronization in Europe

Abstract

We examine the average expansion and contraction magnitude and their average duration for the PIIGS, Portugal, Italy, Ireland, Greece and Spain. We then examine the synchronization of financial and economic variables, namely GDP, equity and housing prices and credit to GDP, between themselves in the same country and between the same variable across countries, to examine their behaviour over the financial business cycle. We found that equity prices expanded and contracted more than the other variables but the difference between expansion and contraction is not significant. Their average duration is shorter than the other variables and housing prices exhibit the longer average duration. We observe a positive synchronization between GDP and household prices for both tested periods for all countries except Ireland and between GDP and household prices for Italy and Portugal respectively. In addition, there is a negative synchronization between equity prices and gaps between GDP to both the countries and the periods examined. There is a positive synchronization between short-term equity and housing prices for all countries, with the exception of Italy, with a negative one for all countries, with the exception of Ireland. The results of the synchronization between the same variable across countries are mixed. Our conclusions may have implications for the design of macro-prudential policies in an environment prone to interdependence between economies.

Keywords

• financial cycle| business cycle| synchronization| Portugal| Italy| Ireland| Greece| Spain