Revisiting business cycles in the Eurozone: A fuzzy clustering and discriminant approach

Abstract

The first part of analysis draws out homogenous clusters of countries out of the 27 EU states based on their business cycle synchronicities with the euro area (EA) 12, quantified by correlations of cycles between the 27 countries’ GDP components and the EA12’s GDP1. The purpose is to compare the obtained country groupings with the countries that have adopted the euro in practice. This exercise is performed using fuzzy cluster analysis and is carried out for pre- and post-euro periods. Knowing that the recent global and euro zone crisis might impact the post-euro findings, the analysis for the post-euro period is done with and without the crisis period. In the second part of the analysis, a discriminant technique is applied to the clustering findings to ascertain the GDP component whose cycle synchronicity contributes most to the partitioning obtained in the cluster analysis. In a nutshell, findings indicate a significant divergence within EU27 and EA12 in the post-euro period and that business cycle symmetry concerning the GDP component of capital investment as a more significant determinant to country partitions.