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Synchronicity and similarity of business cycles ; Croatia vis à vis new EMU countries

The introduction of the euro for Croatian citizens meant the abandonment of the deutsche mark, a reliable currency, which had been used for a long time for comparison purposes and savings. Today, Croatia is a small, opened, indebted and highly euroised country, in which frequently mentioned introduction of euro is seen as a solution that could improve country’s economic position. The question of a common monetary policy is closely related to the issue of business cycle coherence between the members of such an area. Although a cycle in economic activity is a stylized fact, in economics it is less clear as to when the fluctuations in macroeconomic variables coincide between countries/regions and when these dynamics synchronize and/or converge. By analyzing two measures of business cycle coherence, namely synchronicity and similarity, between Croatia and new EMU members, we want to reconcile with vast empirical evidence supporting the hypothesis that monetary integration process results from a greater business cycle convergence and leads to an optimal currency area which finally leads to greater economic welfare in each of the member countries. Estimations are based on deviation cycle approach. Results in general indicate relatively similar cycle dynamics across the observed variables, suggesting that Croatia satisfies this selective criterion for its inclusion into the monetary union. Nonetheless, monetary integration is far more complicated issue, hence it requires further scientific verification and conceptualization.

business cycle coherence ; deviation cycle analysis ; HP filter ; Chow test ; Croatia ; EMU

This work has been fully supported by the Croatian Science Foundation under the project number 9481 Modelling Economic Growth - Advanced Sequencing and Forecasting Algorithm. Any opinions, findings, and conclusions or recommendations expressed in this material are those of the author(s) and do not necessarily reflect the views of Croatian Science Foundation.