Business Cycle Synchronization of the Euro Area with the New and Candidate Member Countries

Abstract

We examine business cycle synchronizations between the euro area and the new and candidate countries of the EU. We utilize a bivariate VAR-GARCH specification with a smoothly time-varying correlation that allows for structural changes in the degree of co-movement between the cyclical components of monthly industrial production. After the application of a Lagrange Multiplier statistic that tests directly the constant correlation hypothesis, we find that all the new EU members and candidate countries (with the exception of Estonia) have at least doubled their business cycle synchronization with the euro area. The results point to great variety in timing and speed of the correlation shifts across the country sample.