Selected Aspects of the Business Cycle Estimation and Correlation in the Eurozone Svatopluk Kapounek Jitka Poměnková (Mendel University, Czech Republic)

Introduction The aim of the paper Theoretical assumptions Methodology and approaches Empirical analysis Conclusion Discussion

Theoretical assumptions business cycle - more or less regular pattern of expansion (recovery) and contraction (recession) in economic activity around the path of trend growth the ECB´s single monetary policy is effective only if this central bank is able to stabilize the sources of cyclical movements in economic activity

The aim of the paper to separate cyclical movements in economic activity to identify its sources in selected regions to analyse cyclical movements correlation degree between the Eurozone and selected countries

Methodology Concepts of business cycle (BC) HP filter, HP filter modification Business cycle synchronization measuring

Methodology Concept of business cycle (BC) Absolute values of GDP (y t ), logged version of data representation in level (Y t ) (It’s because changes in the log of a varible y t over time represent the growth rate of the variable.) Growth type of business cycle (GC) is more suitable for economics with higher rate of growth. For the most part it is posstransforming type of economy where Czech republic belongs.

Methodology HP filter, HP filter modification HP filter decompose Y t into nonstationary trend g t (growth component) and residual component c t (cyclical component) Y t =g t + c t, t=1,...,T. Application of the HP filter involves minimizing the variance of the cyclical component c t subject to a penalty for the variance in the second difference of the growth component g t

Methodology Standart concept of HP filter Y t =g t + c t, t=1,...,T. Growth cycle type dY t =w t + ε t, t=1,...,T. HP filter idea is modified: –on 1st order difference of log(y t ) denoted as dY t, –where w t is more or less regular economic activity fluctuation, –ε t are residuals. –Residuals are taken as unsteady component of random character noting unexpecting effects occuring in economy. –Then, based on the facts above, growth cycle represents cyclical fluctuation after removing long-standing trend. If it is nonstationary in zero mean constant, we can expect existence of some trend. HP filter approach is used for identification of potential time trend of w t, in the sence of growth business cycle on cyclical component.

Methodology Measure of business cycle synchronization Wide range of methods (OCA, VAR, IR function, etc.) Correlation..?? –Correlation of growth business cycle trends –EA versus country

Empirical analysis Data – quarterly absolute values of GDP –EA12, Czech republic, Germany, Netherlands, Irelands, Spain, Austria Time – 1998:Q1 – 2008:Q2

Sources of cyclical movements Tabular 1: Cyclical behavior of the Eurozone and Czech Republic, 2002:Q1-2008:Q2

Empirical analysis How monetary forces can be significantly correlated with real business cycle fulctuations if the agents are assumed to behave rationally? There are two ways how explain the correlation or causality. –The first is formulated by Robert Lucas. Monetary shocks induce the confusion, because it is difficult for agents to separate relative price changes from aggregate price changes. –The second one, more realistic, holds that monetary shocks have important real effects because of rigidities in prices or wages.

Empirical analysis Fig. 1: Dependence AE growth business cycle trend on CZ growth business cycle trend (points), axis of the first quadrant (doted line).

Empirical analysis Fig. 2: Dependence AE growth business cycle trend on Ireland growth business cycle trend (points), axis of the first quadrant (doted line).

Empirical analysis Fig. 3: Dependence AE growth business cycle trend on Spain growth business cycle trend (points), axis of the first quadrant (doted line).

Empirical analysis Fig. 4: Dependence AE growth business cycle trend on Germany growth business cycle trend (points), axis of the first quadrant (doted line).

Empirical analysis Fig. 5: Dependence AE growth business cycle trend on Netherlands growth business cycle trend (points), axis of the first quadrant (doted line).

Empirical analysis Fig. 6: Dependence AE growth business cycle trend on Austria growth business cycle trend (points), axis of the first quadrant (doted line).

Conclusion cyclical movements are highly correlated with the monetary base the single monetary policy is efficient to stabilize these movements asymmetric cyclical movements come to be symmetric in time (CZ, IE, SP) larger movements are more symmetric (CZ, IE, SP)

Discussion abstract from time lags in correlation analysis (sources of c.movements) monetary base really induce the real GDP? (endogeneity of money)

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