BUSINESS CYCLE SYNCHRONIZATION IN EUROPEAN ECONOMIC AND MONETARY UNION (EMU): TESTING THE OCA DURING FINANCIAL CRISIS

Business cycle synchronization is of vital importance in the functioning of monetary union. A single monetary authority pursuing a “one size fits all monetary policy” would not be able to address problems such as inflation or unemployment of members which have divergent business cycles. Therefore, business cycle synchronization is regarded as a meta criterion for the optimum currency area theory. Several studies in literature have tested the business cycle synchronization and have particularly focused on Economic and Monetary Union (EMU). Most studies have used correlation of the cycles as a synchronization measure. In this study, the business cycle synchronization in EMU12 countries from 1980 to 2014 was tested and the mean of the bilateral correlation coefficients of the cycles was used as a synchronization measure as recommended by Massmann and Mitchell (2003). However, differing from previous studies, the current study tested the business cycle synchronization during the financial crisis. Three important findings emerged as a result. First, synchronization increases with monetary integration as argued by Frankel and Rose (1998). Second, the correlations of the cycles rise with the financial crisis. Third, business cycle synchronization drops in the aftermath of financial crisis due to the different recovery paths of respective countries.