Some aspects of the OECD business cycle - The effects of EMU -

In this paper, the effects of economic and monetary union on business cycles in the euro area are described. In particular, the following two points will be examined: i) whether co-movement of business cycles in the euro area from the introduction of the Economic and Monetary Union (hereinafter referred to as the "EMU") was caused by the factors unique to Europe, or whether it is a phenomenon that could be also observed in other areas, and ii) how the restrictions on monetary and fiscal policies in the euro area before and after the introduction of EMU impacted the business cycles. The results obtained in this paper can be summarized as follows. 1) As a worldwide tendency, it is confirmed that the co-movement of business cycles has increased after the 1990s. 2) In the euro area, after the mid-1990s, during the effort period toward the introduction of the EMU, the convergence of business cycles was remarkable. However, after the EMU was introduced in 1999, the co-movement of business cycles in the euro area has decreased again. 3) While the U.K., Norway, and other non-member countries of the EMU have different business cycles from the euro area, their business cycles show stronger co-movement with that of Euro rather than that of U.S. economy. In particular, since the first quarter of 1999, the introduction of the euro, it is worth noting that the U.K. has exhibited a lower co-movement with the U.S. economy while maintaining its co-movement with the Euro economy. Canada has shown increasingly stronger co-movement with both the U.S. economy and the Euro economy. This means that the existence of a business cycle in the Euro economy, as argued in Stock and Watson (2005), was confirmed; however, the existence of a business cycle in the English-speaking world (the U.S., the U.K., Canada, etc.) was not confirmed. 4) It is thought that the restrictions on monetary and fiscal policies by the introduction of the EMU system have had a great influence on the co-movement of business cycles in the euro area. It has been confirmed that the fiscal policies implemented in the euro area in the 1990s were those for satisfying the EMU membership criteria, which were the fiscal policies for business cycles rather than their own countries' economic conditions. Also the policies tended to converge. However, after the introduction of the EMU, the fiscal policies may have been implemented according to each country fs individual circumstances. 5) In the euro area, the autonomy of monetary policies has been lost by the introduction of the EMU. However, what cannot be controlled by monetary policies and the policies in line with each country's economic condition are addressed by fiscal policies. In recent years, the co-movement of business cycles in the euro area seen in the 1990s has decreased. A future subject of study will be investigating whether the co-movement of business cycles will increase again by further development of economic integration or whether the business cycles of each country will become more irregular by diversification of economic activities in the euro area.