Business cycle synchronization and asymmetry in the European Union

Abstract

Measuring output gaps and assessing business cycle synchronization across countries can be an important research theme for an economic union. However, different empirical models can lead to very different inference about output gaps. We analyze business cycle movements and synchronization for all European Union members for the period 1975Q1–pre-COVID and 1975Q1–2022Q4. We account for model uncertainty by averaging across a set of output gap models both by using a Phillips Curve motivated weighted average and a simple average. Similarly, we compare several alternative synchronization measures. We find that, in contrast to the previous literature, both the estimated output gap and the level of synchronization depend on the individual empirical measure used. Our averaged gaps match recession dates well and suggest that many of the countries exhibit a high degree of business cycle nonlinearities. Finally, the core Eurozone countries are highly synchronized, but there are differences in synchronization outside the core.