In recent years, studies of the euro area business cycle have flourished. However, national statistics have only recently been harmonized and aggregate statistics have only been available for a short period of time. Clearly, there is a need to establish stylized facts for the euro area economies and European Monetary Union gives an opportunity to analyse questions such as whether the loss of independence in the conduct of monetary policy has affected national business cycles. A new Volume published by the Centre for Economic Policy Research (CEPR), ‘The Euro Area Business Cycle: stylized facts and measurement issues’ presents four papers by leading economists that examine different aspects of business cycle measurement for the euro area. CEPR Research Fellow Lucrezia Reichlin, who will begin as head of research at the European Central Bank in February 2005, has edited the Volume.
In their Paper ‘Euro Area and US Recessions, 1970-2003’, Domenico Giannone (ECARES, Université Libre de Bruxelles) and Lucrezia Reichlin (ECARES, Université Libre de Bruxelles and CEPR) analyse the relation between (1) the level cycle: the level of economic activity, and (2) the growth cycle: the rate of economic growth. They use both definitions of economic activity to compare the behaviour of the economies of the euro area and the United States. The Paper starts from the observation that, although level cycles are strikingly similar in the euro area and the US, the growth rate of output in the euro area is less volatile than in the US and more protracted. This implies that the effect of an economic shock from outside the euro area lasts longer than in the US. Giannone and Reichlin use a statistical model of joint US-euro area output behaviour that is able to simulate characteristics of both definitions of economic activity. The model implies that a world technological shock would be immediately absorbed by the US economy but would take longer to be absorbed by the euro area economies. The euro area does eventually catch up with the US but this takes around ten years.
The authors also analyse consumption and conclude that the welfare cost associated with output fluctuations is likely to be larger in the euro area than the US. The Paper provides food for thought for understanding the causes of differences in the economic performance of the euro area and the US and the role played by policy.
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