European Business Cycles: New Indices and Analysis of their Synchronicity
his article presents a new type of business-cycle index that allowsM for cycle-to-cycle comparisons of the depth of recessions within a country,M cross-country comparisons of business-cycle correlation andM simple aggregation to arrive at a measure of a European business cycle.M The paper examines probit-type specifications of binary recession/expansionM variables in a Gibbs-sampling framework, wherein it is possible to incorporateM time-series features to the model, such as serial correlation,M heteroscedasticity and regime switching. The data-augmentation impliedM by Gibbs sampling generates posterior distributions for a latent coincidentM business-cycle index and extracts information from indicator variables,M such as the slope of the yield curve.M Sub-sample correlations between an aggregated `Europe'' index andM the national business-cycle indices from France, Germany, ItalyM are consistent with the claimM that the European economies are becoming more harmonizedM over time, but there is no guarantee that this patternM will hold in the future.
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