Continuing integration in Europe? Some empirical evidence on European industrial production cycle

Abstract

The paper deals with assessing the common trends in business cycle similarity and convergence in Europe. The main goal of the paper is to identify common cyclical co-movements and trends in convergence among the European countries so that the emerging European business cycle could be identified. Concerning the factors of business cycle, the research question of the paper is based on assumption that the integration effects are so dominant to bring the European cycle into existence. Also a potential influence of the global crisis on European and world business cycles is examined in the paper. The industrial production index is used to approximate business cycles. Hodrick-Prescott filter, Christiano-Fitzgerald filter and first differencing were used to dissect the cyclical components and identify the cycles in the data. The co-movements, trends of convergence and divergence of business cycles are identified using correlation analysis. Particularly, actual cross correlation and historical correlation in separated subsequent periods is applied in the analysis. Also an original measure of the European business cycle emergence was applied. The results do not provide an evidence of emerging European business cycle contrary to US cycle. The global economic crises was identified as a kind of negative symmetric shock pushing all major economies towards the recession phase of the cycle und thus increasing similarity. The results also shed some light on an influence of different detrending techniques when dissecting the cycles from the input macroeconomic time series.