Output Correlation and EMU: Evidence from European Countries

Output Correlation and EMU: Evidence from European Countries

This paper examines the endogenous nature of business cycle synchronization. Using the residual cross-correlation approach, we explore output correlation between European EMU member countries. Our findings can be summarized as follows: (i) contemporaneous correlation estimates become more significant during the EMU period; (ii) business cycles are dependent but not highly synchronized during the pre-EMU period; (iii) after the transition to EMU, business cycles are dependent and more highly synchronized. These empirical results suggest that costs arising from asymmetric business cycles have a tendency to decrease. On these grounds, we conclude that the endogeneity of OCA hypothesis holds in the case of the euro area.