Essays on Macroeconomic Dynamics: Trade, Integration and E(M)U Business Cycles.

Abstract

Questions surrounding the macroeconomic dynamics in the cross-country context of the EU are investigated. Both scal and monetary policy issues are included in the analysis of this study. Chapter 1 revisits the debate surrounding the twin de cits hypothesis. The literature that tests for twin de cits is reviewed with focus on empirical applications to the EU. The impact that currency unions might have on twin de cits is investigated. A Panel VAR is used to test for the existence of twin de cits on EU data. The results support evidence for the existence of twin de cits within the EU but to a smaller degree than previous papers have suggested. Chapter 2 looks that the relationship between trade and business cycle synchronization. Attention is paid to the methodological issues surrounding the extraction of business cycles from the data. Next, a system of endogenous equations is estimated to test whether trade is signi cant in driving business cycle synchronization. The results show that trade is positive and signi cant in promoting cycle synchronization. Finally, Chapter 3 measures the degree of symmetry within the EU. A novel index is proposed which attempts to measure the speed of adjustment of demand to a supply-side shock. The index is then used in an empirical estimation to test whether the other components identi ed by the Optimal Currency Area (OCA) literature are signi cant in determining symmetry. The results show that openness and in particular, international trade, is positive and signi cant in promoting a faster demand-side response to a supply-side shock.