Wavelet Analysis of Business Cycle Synchronization in Europe

Sammanfattning: Business cycle synchronization is an essential criterion for creating and maintaining an optimal currency area. In this paper, it is investigated whether this required criterion holds for the Euro area at different time horizons (short run, medium run and long run), and if the financial crisis of 2007-2008 influenced the degree of synchronization in Europe. Wavelet analysis on the real GDP growth and unemployment rate is used to investigate business cycle synchronization between the EU-15 countries. The data is decomposed into time and frequency using both the continuous wavelet transform and the discrete wavelet transform, and varimax rotated principal component analysis is used to investigate business cycle synchronization at the different time horizons. It is found that there is a high degree of business cycle synchronization in Europe for the different time horizons considered, however the core is more synchronized while some peripheral countries tend to diverge. Furthermore, our results also suggest that there has been an increase in business cycle synchronization after the financial crisis for the core but not for some peripheral countries.