Migration and business cycles: testing the OCA theory predictions in the European union

Abstract

ABSTRACT The labour mobility is one of the main criteria of the optimum currency areas theory, that formed a basis for the business cycle synchronization research in the last 20 years. However, the link between migration and business cycle comovement has not been established previously due to the lack of data. Using the newly available database on bilateral migration flows, this article fills the gap in the existing literature. The results from the Bayesian model averaging of dynamic panels with weakly exogenous regressors show the existence of a strong link between bilateral migration and business cycle comovement. These results are in line with the predictions of the optimum currency areas theory. Moreover, the relative importance of migration flows is higher than others well-established determinants of business cycle synchronization. Consequently, the results show that the European Union is moving closer to becoming an optimum currency area.