Abstract
This paper investigates the dynamic effects of common macroeconomic shocks in shaping business cycle fluctuations in a group of Euro-area countries. In particular, by using the structural (near) VAR methodology, we investigate the effect of area-wide shocks, with particular attention to monetary policy shocks. The main conclusion is that: (a) contractionary monetary policy shocks cause similar recessionary effects in all countries; (b) as far as business cycle fluctuations are concerned, there is a separation into two distinct groups of countries, with a first group including the biggest European economies in which business cycle fluctuations are mainly explained by common, area-wide shocks and a second one, including Greece, Ireland and Portugal, in which the national shocks play, instead, a much greater role.
Highlights
An important question related to the Euro-area economy concerns the possibility that aggregate macroeconomic shocks may exert different effects in specific member countries
Around fifteen years have elapsed from the start of the European Monetary Union (EMU) and we begin to dispose of enough data in order to study the influence of European Central Bank (ECB)’s monetary policy choices on the economic activity of Euro area countries
In the present research we obtain two main results: (a) there is no particular evidence of asymmetric effects of monetary policy shocks since an unexpected monetary tightening causes a recession in all countries; (b) business cycle fluctuations in the biggest European economies are predominantly driven by common, area-wide shocks but, and maybe not surprising, this conclusion does not hold for Greece, Ireland and Portugal
Summary
An important question related to the Euro-area economy concerns the possibility that aggregate macroeconomic shocks may exert different effects in specific member countries. We want to investigate if the dominant source of macroeconomic fluctuation at the national level is represented by exogenous, Euro-area shocks or, alternatively, by local shocks This is a central question, since in order to allow a smooth functioning of a monetary union, with a central bank conducting its monetary policy at a supra-national level, the convergence of business cycles is of paramount importance. In the present research we obtain two main results: (a) there is no particular evidence of asymmetric effects of monetary policy shocks since an unexpected monetary tightening causes a recession in all countries; (b) business cycle fluctuations in the biggest European economies are predominantly driven by common, area-wide shocks but, and maybe not surprising, this conclusion does not hold for Greece, Ireland and Portugal.
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