Discussions of economic and monetary union in Europe have highlighted the need to identify cross-country symmetries and asymmetries in business cycle fluctuations. If countries' responses to shocks are similar and synchronous, common policies implemented by Community institutions will be appropriate, but asymmetric policies will be required to cope with cycles that differ in intensity, duration and timing. In Discussion Paper No. 809, Research Fellows Nicos Christodoulakis and Tryphon Kollintzas, with Sophia Dimelis, consider the case of Greece, whose economy is often thought so different from those of its EC partners that it cannot or should not join a European monetary union.

They use the KydlandPrescott real business cycle approach to study the fluctuations and co-movements of Greece's key macroeconomic variables and compare them with those of other EC members. Since the statistical properties of the detrended components remain controversial, they examine the sensitivity of their findings to the detrending methodology. They find that business cycle propagation mechanisms are fairly similar for Greece and other EC countries, notwithstanding significant differences in their patterns of fiscal and monetary policies and terms of trade; economic integration that includes Greece under a set of common institutions and policies should not pose a problem.

Christodoulakis, Dimelis and Kollintzas then compute contemporaneous cross-correlations for all main economic variables across the Community, which provide further support for the similarity of business cycle propagation mechanisms. The behaviour patterns of variables that are not directly controlled by government (consumption, inventories, net exports and prices) are very similar, while those directly controlled by institutions (public spending and money supply) behave very differently. This should mitigate the concern that common institutional arrangements and policies will exacerbate business cycles in face of asymmetric shocks. Such observed differences in shocks and business cycle mechanisms should rather tend to disappear as common European institutions and policies emerge.

Comparisons of Business Cycles in Greece and the EC: Idiosyncrasies and Regularities
Nicos Christodoulakis, Sophia P Dimelis and Tryphon Kollintzas

Discussion Paper No. 809, July 1993 (IM)