Business Cycle Convergence or Decoupling? Economic Adjustment of CESEE Countries during the Crisis Conference on European Economic Integration (CEEI) Helsinki, November 27, 2012 Doris Ritzberger-Grünwald, Martin Gächter and Aleksandra Riedl Oesterreichische Nationalbank Foreign Research Division
Overview 1. Motivation 2. Business Cycle vs. Income Convergence 3. Data and Methods 4. Empirical Results Cyclical heterogeneity in CESEE Decoupling from the euro area? Implications for the catching-up process 5. Conclusions - 2 - www.oenb.at oenb.info@oenb.at
Motivation Wide-ranging economic coordination measures across the EU-27 − 2004/2007: EU accession of CESEE countries (Copenhagen criteria) − Since 2011: − Fiscal policy: strengthening the Stability and Growth Pact − Structural policy: Europe 2020 growth strategy − Monetary policy: common currency area for all EU countries in the long run ⇒ Have GDP growth patterns of the CESEE countries and the euro area become more similar? ⇒ Does the adjustment process differ between large and small countries? ⇒ Has the Great Recession changed these patterns? - 3 - www.oenb.at oenb.info@oenb.at
Two Main Literature Strands on Convergence 1. Convergence of income (GDP per capita) – the long run − Implies negative correlation between GDP-per-capita level and corresponding growth rates in the long run − Focuses on catching-up process of emerging market economies (EMEs) 2. Convergence of business cycles – the short run − Focuses on short-run fluctuations around long-run trend GDP − Particularly relevant as OCA meta-criterion - 4 - www.oenb.at oenb.info@oenb.at
Convergence of Income: Strong Catching-Up Process in CESEE since 2000 CES ESEE v EE vs. EA EA c countries (2000-2011) 2011) CESEE: s small vs. large c ge countries es (2000 2000-2011) 2011) Cumulative GDP p.c. growth in % Cumulative GDP p.c. growth in % 140 140 120 120 100 100 80 80 60 60 40 40 20 20 0 0 $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $0 $5,000 $10,000 $15,000 $20,000 E A (12) New E A (5) CE S E E (8) S mall CE S E E (S I S K HR BG E E LV LT) Large CE S E E (PL RO CZ HU) Source: IMF WEO Database (Oct. 2012), own calculations. Source: IMF WEO Database (Oct. 2012), own calculations.. - 5 - www.oenb.at oenb.info@oenb.at
Literature on Business Cycle Convergence BC synchronization in Europe widely examined topic since the 1990s − BC convergence in the euro area in 1990s, stabilization at high levels thereafter − E.g. Artis & Zhang (1999), de Haan et al. (2008) Increased interest on CESEE region before EU enlargement − High BC synchronization for some countries, lower for others − E.g. Fidrmuc & Korhonen (2006), Eickmeier & Breitung (2006), Darvas & Szapáry (2008) − BC fluctuations generally more pronounced in CESEE countries than in advanced economies (Benczúr & Rátfai, 2010) - 6 - www.oenb.at oenb.info@oenb.at
Convergence of Business Cycles: Increased Synchronization or Decoupling? Decoupling hypothesis − Kose et al. (2012): Decoupling of EMEs from advanced economies, but BC convergence within the two groups − On the one hand… increasing bilateral trade leads to higher BC synchronization (Frankel & Rose, 1998) − But on the other hand… rapidly rising income levels in EMEs expand domestic markets and reduce dependence on advanced economies. Our contribution − CESEE – euro area − Effect of the Great Recession − Small vs. large countries - 7 - www.oenb.at oenb.info@oenb.at
Data and Methods Data − Quarterly real GDP (seasonally adjusted) from Q1 1999 to Q1 2012 − Country sample: euro area (12), new euro area countries (5) and remaining CESEE EU Member States, including Croatia (8) − Eurostat Decomposition method − Hodrick-Prescott (1997) filter to calculate trend (potential) GDP and cyclical components − Purely statistical decomposition technique − Caveat: Estimates at the end of the sample period can be biased - 8 - www.oenb.at oenb.info@oenb.at
Trend GDP versus Cyclical Component GDP can be decomposed into (Log) GDP, T Trend G nd GDP a and nd Cyclical Compo pone nent nts Real GDP(in logs) Cyclical component (in percentage points) 11.4 3.0 (i) trend GDP and (ii) a cyclical component 11.3 2.0 11.2 1.0 11.1 0.0 11.0 -1.0 10.9 -2.0 10.8 -3.0 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1 2012Q1 Cyclical Component Trend GDP GDP (in logs) S ource: Eurostat, own calculations. - 9 - www.oenb.at oenb.info@oenb.at
Measures of Business Cycle Synchronization BC synchronization implies… − that the cyclical components of two countries are moving up/down simultaneously, and/or − that the cyclical components show similar values at a given point in time. − Therefore, increasing BC synchronization is also referred to as BC convergence. Accordingly, we use two different measures: − Correlation : Strength of linear relationship between two time series of cyclical components (in two-year rolling windows) − Dispersion: Standard deviation of cyclical components across the examined country sample - 10 - www.oenb.at oenb.info@oenb.at
More Pronounced BC Heterogeneity across CESEE than across Euro Area during Crisis Dispersion Correlation Standa ndard de d deviations ns of c cyclical compo pone nent nts Average C Correlation o n of i indi ndividua dual count untry cycles correlation coefficient in percentage points 1.0 5.0 4.0 0.5 3.0 0.0 2.0 -0.5 1.0 0.0 -1.0 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1 2001Q1 2003Q1 2005Q1 2007Q1 2009Q1 E A (12) CE S E E (8) E A (12) with E A (12) Cycle CE S E E (8) with CE S EE (11) Cycle S ource: Eurostat, own calculations. S ource: Eurostat, own calculations. - 11 - www.oenb.at oenb.info@oenb.at
More Pronounced BC Heterogeneity across CESEE than across Euro Area during Crisis Dispersion Correlation Standa ndard de d deviations ns of c cyclical compo pone nent nts Average C Correlation o n of i indi ndividua dual count untry c cycles correlation coefficient in percentage points 1.0 5.0 4.0 0.5 3.0 0.0 2.0 -0.5 1.0 -1.0 0.0 2001Q1 2003Q1 2005Q1 2007Q1 2009Q1 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1 E A (12) with E A (12) Cycle New E A (5) with CE S E E (11) Cycle E A (12) CE S E E (8) CE S E E (8) with CE S EE (11) Cycle E A (12) + New EA (5) CE S E E (8) + New E A (5) New E A (5) with E A (12) Cycle S ource: Eurostat, own calculations. S ource: Eurostat, own calculations. - 12 - www.oenb.at oenb.info@oenb.at
Larger Cyclical Swings in CESEE, Particularly in Smaller Countries Indi ndividua dual CESEE (11) count untry cycles Indi ndividua dual E EA (12) c count untry c cycles C yclical component C yclical component 0.15 0.15 0.10 0.10 0.05 0.05 0.00 0.00 -0.05 -0.05 -0.10 -0.10 -0.15 -0.15 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1 S I S K HR BG BE IE GR LUX E E LV LT HU NL AT P T FI P L RO CZ DE FR IT E S S ource: Eurostat, own calculations. S ource: Eurostat, own calculations. - 13 - www.oenb.at oenb.info@oenb.at
Smaller Economies Tend to Be More Open CESEE: S Size e and O Open ennes ess of t the e ec economy (2011) 2011) Euro Area ea: Size e and O Open ennes ess o of t the e ec economy (2011) 2011) Trade (in % of G DP ) Trade (in % of G DP ) 200 200 IE 180 180 EE SK HU BE 160 160 LT NL SI 140 140 CZ BG LI 120 120 AT 100 100 DE PL HR RO FI 80 80 PT ES 60 60 GR IT FR 40 40 20 20 Small Large Small Large 0 0 0 100 200 300 400 500 600 700 0 500 1000 1500 2000 2500 3000 R eal G DP (in bn EUR P P S ) R eal G DP (in bn EUR P P S ) S ource: AMEC O. S ource: AMEC O. - 14 - www.oenb.at oenb.info@oenb.at
Decoupling of CESEE from the Euro Area … Dispe persion o n of the he i indi ndividua dual C CESEE (11) cycles from Correl elation bet etween een the i e individual C CESEE (11) 11) c cycles es EA ( (12) 12) cycle and the E e EA ( (12) 12) c cycle, e, 2-years r rollin lling w win indow in percentage points correlation coefficient 6.0 1.0 5.0 0.5 4.0 3.0 0.0 2.0 -0.5 1.0 0.0 -1.0 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1 2001Q1 2003Q1 2005Q1 2007Q1 2009Q1 CE S E E (11) CE S E E (11) S ource: Eurostat, own calculations. Quelle: Eurostat, own calculations. - 15 - www.oenb.at oenb.info@oenb.at
… Driven by Small Countries Dispe persion o n of the he i indi ndividua dual C CESEE (11) cycles from Correl elation bet etween een the i e individual C CESEE (11) 11) c cycles es EA ( (12) 12) cycle and the E e EA ( (12) 12) c cycle, e, 2-years r rollin lling w win indow in percentage points correlation coefficient 6.0 1.0 5.0 0.5 4.0 3.0 0.0 2.0 -0.5 1.0 0.0 -1.0 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1 2001Q1 2003Q1 2005Q1 2007Q1 2009Q1 CE S E E (11) CE S E E (11) CE S E E S mall (S I S K HR BG E E LV LT) CE S E E S mall (S I S K HR BG E E LV LT) CE S E E Large (P L RO CZ HU) CE S E E Large (P L RO CZ HU) S ource: Eurostat, own calculations. Quelle: Eurostat, own calculations. - 16 - www.oenb.at oenb.info@oenb.at
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