nep-tra New Economics Papers
on Transition Economics
Issue of 2013‒03‒23
23 papers chosen by
J. David Brown
IZA (Institute for the Study of Labor)

  1. What determines stock market behavior in Russia and other emerging countries? By Korhonen, Iikka; Peresetsky , Anatoly
  2. The Role of Household Saving in the Economic Rise of China By Steven Lugauer; Nelson C. Mark
  3. The global impact of Chinese growth By Ippei Fujiwara
  4. Entrepreneurial Universities and Industrial Creation in China By Jin, Hua
  5. Motivation to Work in Russia: The Case of Protracted Transition from Noncompetitive to Competitive System By Anikin, Vasiliy
  6. Revisiting the Empirical Inconsistency of the Permanent Income Hypothesis: Evidence from Rural China By Liping Gao; Hyeongwoo Kim; Yaoqi Zhang
  7. A Theoretical Model of the Chinese Labor Market By Fields, Gary; Song, Yang
  8. Between Modernization and Stagnation. Russian Economic Policy and Global Crisis By Vladimir Mau
  9. Mode of socio-economic development and occupational structure: the case of contemporary Russia By Anikin, Vasiliy
  10. Social Learning and Health Insurance Enrollment: Evidence from China's New Cooperative Medical Scheme By Liu, Hong; Sun, Qi; Zhao, Zhong
  11. Do Parents Drink Their Children's Welfare? A Joint Analysis of Intra-Household Allocation of Time By Giannelli, Gianna Claudia; Mangiavacchi, Lucia; Piccoli, Luca
  12. Does Monetary Policy Matter in China? A Narrative Approach By Sun, Rongrong
  13. Optimal economic policy and oil prices shocks in Russia By Semko Roman
  14. Entrepreneurship of the Left-Behind By Giulietti, Corrado; Wahba, Jackline; Zimmermann, Klaus F.
  15. China's economic growth and rebalancing By Ettore Dorrucci; Gabor Pula; Daniel Santabárbara
  16. The System of Revenue Sharing and Fiscal Transfers in China By Xiao Wang; Richard Herd
  17. External competitiveness of EU candidate countries By Lucia Orszaghova; Li Savelin; Willem Schudel
  18. Cyclical relationship between exchange rates and macro-fundamentals in Central and Eastern Europe By Stavarek, Daniel
  19. To Be or Not to Be: When Should a Threshold Firm in an Emerging Market Move to Professional Management? By Shirokova Galina; Knatko Dmitri; Vega Gina
  20. Top‐Down vs. Bottom‐Up: The Long‐Term Impact of Government Ideology and Personal Experience on Values By Ziebarth, Nicolas R.; Wagner, Gert G.
  21. Consecințele migrației externe asupra pieței muncii din România By Juravle, Daniel
  22. Long Memory in the Ukrainian Stock Market By Guglielmo Maria Caporale; Luis A. Gil-Alana
  23. Business cycle convergence or decoupling? Economic adjustment in CESEE during the crisis By Gächter, Martin; Riedl , Aleksandra; Ritzberger-Grünwald, Doris

  1. By: Korhonen, Iikka (BOFIT); Peresetsky , Anatoly (BOFIT)
    Abstract: We empirically test the dependence of the Russian stock market on the world stock market and world oil prices in the period 1997:10–2012:02. We also consider three Eastern European stock markets (Poland, the Czech Republic, and Hungary), as well as two markets outside Europe (Turkey and South Africa). We apply a rolling regression to identify periods when oil prices or stock indices in the US and Japan were important. Surprisingly, oil prices are not significant for the Russian stock market after 2006. A TGARCH-BEKK model is employed to assess the degree of correlation between markets, taking into account the global market stochastic trend. We find that correlation between markets increased between 2000 and 2012. Growth was especially high in Eastern European markets during 2004–2006, which is likely connected with the EU accession of these countries in 2004.
    Keywords: Russian stock market; oil; financial market integration; stock market returns; news; emerging markets; transition economies
    JEL: C58 G10 G14 G15
    Date: 2013–03–18
  2. By: Steven Lugauer (University of Notre Dame); Nelson C. Mark (University of Notre Dame and National Bureau of Economic Research and Hong Kong Institute for Monetary Research)
    Abstract: The saving rate in China is high by historical and international norms. The high saving rate has funded capital accumulation which in turn has been the primary driver of China's economic growth. We review the evidence on Chinese household saving and conduct a small study to assess the importance of the precautionary motive for saving.
    Keywords: Household Saving, Precautionary Motive, China
    JEL: E21 F42
    Date: 2013–04
  3. By: Ippei Fujiwara
    Abstract: Three decades have passed since China was dramatically ‘opened up’ to the global market and rapidly began to catch up with leading economies. In this paper we discuss the effects of China’s opening-up and its rapid growth on the welfare of both China and the rest of the world (ROW). We find that the opening-up per se is welfare improving for China but has had little impact on the ROW; that the opening-up of China could be beneficial to the ROW if it led to significant productivity growth in China; and that China’s balanced trade policy after the opening-up has helped the ROW rather than China. We conclude that from an ROW perspective and according to a simple neoclassical model with complete markets, a gradual trade liberalisation in China is preferable.
    JEL: E13 F41 O47
    Date: 2013
  4. By: Jin, Hua
    Date: 2013–03
  5. By: Anikin, Vasiliy
    Abstract: This paper aims to determine what challenges Russia faces upon transitioning to a competitive system. As a main characteristic of the labour force, the motivation to work is studied in terms of three dimensions: 1) the value of current work, 2) orientation to a potential job, and 3) aspirations with respect to work. Analysis revealed the existence in Russia of homogeneous groups of workers, in terms of their motivation; this status quo is typical of both late-industrial and postindustrial societies. The author therefore argues for the complexity of ‘competitive areas’ and the simplicity of ‘noncompetitiveness’ in contemporary Russia. Meanwhile, the socioeconomic limitations to the proliferation of intrinsic and nonhygiene motivations on the one hand, and the predominance of monetary and extrinsic motivations on the other, provide evidence that one should consider Russia a country in protracted transition.
    Keywords: transition, modernization, motivation to work, labour force, Russia
    JEL: O10 P29 P39
    Date: 2013–01–20
  6. By: Liping Gao; Hyeongwoo Kim; Yaoqi Zhang
    Abstract: Chow (1985) reports strong evidence in favor of the permanent income hypothesis (PIH) using observations from 1953 to 1982 in China. We revisit this issue with rural area household data in China during the post economic reform regime (1978-2009) as well as the postwar US data for comparison. Our in-sample analysis provides strong evidence against the PIH for both countries. Out-of-sample forecast exercises also reveal that consumption changes are highly predictable. Our vector autoregressive (VAR) model analysis also shows significantly positive responses of consumption to income shocks, and non-negligible proportions of variations in consumption are explained by innovations in income.
    Keywords: Permanent Income Hypothesis; Consumption; Generalized Method of Moments; Diebold-Mariano-West Statistic; Vector Autoregressive
    JEL: E21 E27
    Date: 2013–03
  7. By: Fields, Gary (Cornell University); Song, Yang (Renmin University of China)
    Abstract: This paper constructs a theoretical labor market model for China, and utilizes the model to examine the effects of various labor market policies on economic well-being. Two key features of the model are a segmented labor market involving three sectors – state-owned enterprises, private enterprises, and agriculture – and China's unique household registration system (hukou). The major existing theoretical models of employment and development – the Lewis model, the integrated labor market model, the Harris-Todaro model, and various segmented labor market models – stylize different developing countries' labor markets in other ways but do not include these two key features. The paper first formulates the equations of the model, then obtains a closed form solution given initial conditions, and then deduces the labor market and welfare consequences of several policy interventions, which include promoting rural development, reducing the cost-of-living in urban areas for rural hukou holders, and offering some rural workers the chance to convert from rural to urban hukou status. These policy interventions are analyzed using two alternative welfare criteria: first-order stochastic dominance and an abbreviated social welfare function. Using both social welfare criteria, it is shown that the rural development policy is unambiguously welfare-improving, while the other two policies have ambiguous effects on social welfare. None of these policies is unambiguously welfare-decreasing.
    Keywords: labor markets, employment, welfare economics, China, hukou
    JEL: I3 J2 O1 O53
    Date: 2013–03
  8. By: Vladimir Mau (Russian Presidential Academy of National Economy and Public Administration; Gaidar Institute for Economic Policy)
    Abstract: The paper deals with the trends in the world and Russian economies towards development of a new post-crisis system, including technological and structural transformation. Three main scenarios of Russian economic development (conservative, innovation and acceleration) are discussed basing on historical analysis of Russian economic performance since 1970-s when oil boom started. On this basis key challenges of economic policy in 2013 are discussed
    Keywords: economic growth, global crisis, modernization, structuãal adaptation, regulation, welfare state
    JEL: O52 P27
    Date: 2013
  9. By: Anikin, Vasiliy
    Abstract: The given paper assumes the existence of a correlation between the occupational structure and the mode of social and economic development of a country. It is shown that the modern stage of development in advanced economies could be described by the post-industrial phase with (a) the specific proportions in the occupational structure (predominance of professional managers and technical experts); (b) particular nature of work and the corresponding extent of labor division according to specialization and qualification (highly skilled labor with broad specialization and a new criterion of creativity included within qualifications). Within the certain historical framework these indicators, combined onto the entire scheme, produce the criteria to distinct different types of socio-economic development and arrange them in consistent order. The analysis of occupational structure of Russian population shows that the reforms of 1990s have facilitated the process of deindustrialization alongside with the growth of semi- and low-skilled jobs. According to the scheme, Russia seems to have reached the stage of the development that is similar to one of the 1950–1960s in the USA and the Europe.
    Keywords: Occupational structure; Socio-economic development; Knowledge based economy; Industrialization;Labour potential; Modernization; Russia
    JEL: J21 O14 P20
    Date: 2013–02–24
  10. By: Liu, Hong (Central University of Finance and Economics); Sun, Qi (Shanghai University of Finance and Economics); Zhao, Zhong (Renmin University of China)
    Abstract: This paper examines the role of social learning in household enrollment decisions for the New Cooperative Medical Scheme in rural China by estimating a static game with incomplete information. Using a rich dataset from the China Health and Nutrition Survey, we find that the social network effects in the enrollment decision are large and significant. Furthermore, we use temporal and spatial proximity among household heads and obtain the result that the primary mechanism for the social network effects is social learning. Our findings indicate that a 10-percentage-point increase in the enrollment rate in a village increases one's take-up probability by 5 percentage points. We also find that the importance of social learning decreases significantly with the development of alternative information channels. Finally, the evidence suggests that healthier, wealthier, relatively well-educated older male household heads with Han nationality tend to be opinion leaders.
    Keywords: rural China, health insurance, social learning, social effect
    JEL: I1 G22
    Date: 2013–02
  11. By: Giannelli, Gianna Claudia (University of Florence); Mangiavacchi, Lucia (University of the Balearic Islands); Piccoli, Luca (University of the Balearic Islands)
    Abstract: The aim of this paper is to investigate whether excessive parental alcohol consumption leads to a reduction of child welfare. To this end, we analyse whether alcohol consumption decreases time spent by parents looking after their children and working. Using the Russia Longitudinal Monitoring Survey, the study focuses on mono-nuclear families with children under fifteen years of age, for whom we estimate a model of intra-household allocation of time. We find that husbands' alcohol consumption has a negative impact on their weekly hours spent doing child care, while no significant effect is observed for mothers' alcohol consumption. We interpret these findings as evidence of a negative impact of fathers' alcohol consumption on child welfare.
    Keywords: child care, time allocation, alcohol consumption, labor supply, Russia
    JEL: D1 I1 J13 J22
    Date: 2013–02
  12. By: Sun, Rongrong
    Abstract: This paper applies the narrative approach to monetary policy in China to tackle two problems of policy measurement. The first problem arises because the PBC (the central bank of China) applies multiple instruments and none of them per se can adequately reflect changes in its monetary policy. The second one is the classical identification problem: the causation direction of the observed interaction between central bank actions and real activity needs to be identified. The PBC’s documents are used to infer the intentions behind policy movements. Three shocks are identified for the period 2000-2011 that are exogenous to real output. Estimates using these shocks and various robustness tests indicate that monetary policy has large and persistent impact on output in China.
    Keywords: exogenous shocks, the narrative approach, real effects of monetary policy
    JEL: E52 E58
    Date: 2012
  13. By: Semko Roman
    Abstract: The goal of the paper is to explain and analyze whether Central Bank of Russia should include commodity prices into the lists of variables they try to respond. We augmented New Keynesian DSGE small open economy model of Dib (2008) with the oil stabilization fund and new Taylortype monetary policy rule and estimated the model using Bayesian econometrics. The results show that Central Bank’s mild response to the oil price changes may be desired in terms of minimizing fluctuations of inflation and output only in the case when stabilization fund would be absent, while this response is redundant when “excess” oil revenues can be saved in the fund.
    JEL: E12 E52 E58 F41
    Date: 2013–03–15
  14. By: Giulietti, Corrado (IZA); Wahba, Jackline (University of Southampton); Zimmermann, Klaus F. (IZA and University of Bonn)
    Abstract: While there is evidence that return migration promotes entrepreneurship and self-employment of those who migrated, previous studies have not focused on whether migration provides the same benefits to individuals who did not migrate. Using a unique dataset that provides information on both current and return migrants in rural China (RUMiC), we investigate the impact of migration on entrepreneurship among individuals with no migration experience. We explore the self-employment choices of individuals who live in households with return migrants and individuals who live in households that have migrants currently in the city, comparing them with individuals living in non-migrant households. Our methodology allows us to control for the potential endogeneity between the migration and self-employment decisions. The results show that return migration promotes self-employment among household members that have not migrated. However, left-behind individuals are less likely to be self-employed when compared to those living in non-migrant households.
    Keywords: rural to urban migration, RUMiC dataset, self-employment
    JEL: J23 J61 O15
    Date: 2013–03
  15. By: Ettore Dorrucci (European Central Bank); Gabor Pula (European Central Bank); Daniel Santabárbara (Banco de España)
    Abstract: In this paper we provide an overview of the growth model in China and its prospects, taking a medium-run to long-run perspective. Our main conclusions are as follows. First, the still prevailing producer-biased model of managed capitalism in China tends to engender, as an inherent byproduct, serious imbalances which cannot be unwound without a fundamental overhaul of the model itself. Second, given the lack of a critical mass of economic reforms thus far, imbalances may (re-)escalate once global and domestic economic conditions normalise. Third, the fundamental factors underpinning growth in China are likely to remain supportive, at least over the medium run. Although this could help mitigate the economic costs of imbalances for some time to come, it could also reduce the incentives for policy-makers to enact much needed reforms. Fourth, delayed policy action and the persistence of the model of growth cum imbalances would increase the risk of China getting caught in the middle-income trap in the long run. Greater political will to redirect China’s growth model towards a more sustainable path is therefore needed. JEL Classification: E21, E22, E25, F14, F43, O11, O53
    Keywords: economic growth, rebalancing, China, imbalances, middle-income trap
    Date: 2013–02
  16. By: Xiao Wang; Richard Herd
    Abstract: The main features of China’s current sub-national finance arrangements date back to the 1994 tax reform. China has a multi-level government structure that shares national tax revenues through a system of tax sharing and transfers, and divides spending assignments and responsibilities. Local governments have hardly any discretionary power to modify taxation, though they have some non-tax revenue from fees, levies and penalties. They can also spend the profit from the sale of land-use rights subject to central government restrictions. As the 1994 tax reform recentralised revenues and decision-making power, vertical gaps between revenue and expenditure at sub-national levels have grown. In order to accommodate this, the central government has raised the scale of transfers. Over the past decade, China’s transfer policy has addressed the horizontal imbalances and become markedly more redistributive. Nevertheless, fiscal disparities within provinces remain high and are much greater than between regions in OECD countries. The extent of fiscal equalisation within provinces varies, thus affecting the delivery of services. The government’s plan to equalise service provision across the country therefore calls for fine-tuning the transfer system and improving local revenue. Some local governments are testing a residential property tax but not in a form that would substantially raise tax revenue. A significant property tax would tend to lower the revenue from the sale of land-use rights and would, in general, improve the fiscal position of those local governments that already have strong budgets. This Working Paper relates to the 2013 OECD Economic Survey of China (<P>Le système de partage des recettes et des transferts budgétaires en Chine<BR>Les principales caractéristiques des accords de financement infranationaux actuels en Chine remontent à la réforme fiscale de 1994. La Chine possède une structure administrative à plusieurs niveaux qui partage les recettes fiscales nationales par le biais d'un système de répartition des recettes fiscales et de transferts, et qui attribue les missions et responsabilités en matière de dépense. Les collectivités locales n'ont guère de pouvoir discrétionnaire afin de modifier la fiscalité, même si elles collectent des recettes non fiscales provenant de divers droits, prélèvements et amendes. Elles peuvent aussi dépenser les recettes provenant de la vente de droits d'usage des terrains sous réserve de restrictions imposées par le gouvernement central. Comme la réforme fiscale de 1994 a centralisé de nouveau les recettes et le pouvoir de décision, les déséquilibres verticaux entre recettes et dépenses au niveau infranational se sont accentués. Afin d'en tenir compte, le gouvernement central a augmenté le volume des transferts. Au cours de la décennie passée, la politique des transferts en Chine a répondu aux déséquilibres horizontaux et est devenue nettement plus redistributive. Néanmoins, les disparités fiscales au sein des provinces demeurent élevées et sont beaucoup plus grandes qu'entre régions des pays de l'OCDE. Le degré de péréquation au sein des provinces varie, ce qui affecte la prestation de services. Afin d’égaliser cette dernière dans tout le pays, le plan du gouvernement appelle donc à peaufiner le système de transferts et à améliorer les recettes locales. Certaines autorités locales sont en train de tester un impôt foncier résidentiel, mais pas sous une forme qui permettrait d'augmenter considérablement les recettes fiscales. Un impôt foncier important aurait tendance à réduire les recettes provenant de la vente de droits d'usage des terrains et, plus généralement, améliorerait la situation financière des administrations locales déjà dotées de solides budgets. Ce Document de travail a trait à l’Étude économique de l’OCDE de la Chine, 2013 (
    Keywords: public finances, local government, China, tax sharing, property taxation, intergovernmental transfers, fiscal disparities, service equalisation, land-use rights, finances publiques, transferts intergouvernementaux, collectivités locales, impôt foncier, Chine, répartition des recettes fiscales, disparités fiscales, égalisation service, droits d'usage des terrains
    JEL: D63 E62 H11 H24 H25 H27 H51 H52 H60 H61 H71 H72 H73 H74 H77 R52
    Date: 2013–02–27
  17. By: Lucia Orszaghova (European Central Bank; Národná banka Slovenska); Li Savelin (European Central Bank); Willem Schudel (European Central Bank)
    Abstract: As the current financial crisis has shown, macroeconomic imbalances such as persistent current account and trade deficits, can seriously undermine a country’s resilience to economic shocks. Maintaining and enhancing external competitiveness has thus become of increasing concern, particularly to European Union (EU) candidate countries whose economic growth models have been challenged in recent years. Drawing on previous studies, this paper assesses developments in the external competitiveness of EU candidate countries between 1999 and 2011. Taking a broad approach to the issue of competitiveness, the paper considers various indicators of both short and long-term competitiveness, including those related to domestic prices and costs, export performance, and institutional and structural issues. In the context of EU integration, comparisons are drawn with developments in the EU12. We find that, during the pre-crisis period, all candidate countries experienced robust export market growth, but also suffered losses in price and cost competitiveness. In terms of export characteristics, progress has been heterogeneous and also fairly slow when compared with the EU12. All candidate countries have increased their number of export products and trading partners, but only a few have been able to export more complex products. As regards structural issues such as corruption and bureaucratic efficiency, all countries have performed quite poorly with the exception of Iceland. JEL Classification: F1, F43, O52, P22
    Keywords: EU candidate countries, external competitiveness, export growth, export specialisation, export product complexity, extensive and intensive margins, intra-industry trade, foreign direct investment, structural characteristics
    Date: 2013–01
  18. By: Stavarek, Daniel
    Abstract: We present empirical evidence on the business cycle relationship between nominal and real effective exchange rate, real GDP, consumption, investment, export, import and general government debt for a group of ten countries from the Central and Eastern Europe. We apply cross-correlation on cyclically filtered and seasonally adjusted quarterly time series over the period 1998-2010. The results are mixed in intensity, direction and cyclicality but show generally weak correlation between exchange rates and fundamentals. Sufficiently high coefficients are found only for government debt and import. We also apply simple regressions to relate the correlation to openness and welfare of the economy. The correlation between exchange rates and macroeconomic aggregates tends to be more pronounced in less open and relatively poorer countries.
    Keywords: business cycle; cross correlation; exchange rate; macroeconomic fundamental; openness; wealth
    JEL: E32 E44 F31
    Date: 2013–03–21
  19. By: Shirokova Galina; Knatko Dmitri; Vega Gina
    Abstract: Recent research emphasizes the importance of the separation of ownership and control for growing threshold firms. Demand for specialized management knowledge by growing owner-run SMEs is usually resolved through the separation of ownership and control, using top management labor market and agency contracts. Under certain environmental institutional conditions, owners of SMEs from emerging markets face difficulties separating ownership and control. For example, the majority of Russian companies are run by their primary owners. In rare situations when separation of ownership and control formally occurs, high risk of economic fraud and owner’s fear often revert management succession to a default owner-control scenario. These conditions pose a threat for a growing threshold firm needing professional management knowledge assets. Using a dataset of 500 entrepreneurial companies from fast growing industries in St. Petersburg and Moscow, this study defines and studies threshold firms and also analyzes how various perceived characteristics of the institutional environment are influencing the probability of separation of ownership and control in threshold firms. According to the estimation results institutional factors such as poor security of ownership rights and misfit of company with formal regulatory norms have a negative impact on the probability of separation of ownership and control in threshold firms. As a result, threshold firms limit their growth possibilities since their access to specialized knowledge is limited to the knowledge base of the owner.
    Date: 2013–04–02
  20. By: Ziebarth, Nicolas R. (Cornell University); Wagner, Gert G. (DIW Berlin)
    Abstract: This paper studies the long‐term impact of societal socialization on values using the example of doping behavior in sports. We apply the German Reunification Approach to the microcosm of Berlin and exploit its 40‐year long division into a capitalist and a communist sector. We deliberately chose attitudes toward doping to test the impact of ideology on values since (i) post‐1989 disappointed economic hopes did not confound doping attitudes, and because of (ii) the systematic GDR state doping activities that became public in reunified Germany in the 1990s. Our findings demonstrate that even after half the time the division lasted, e.g. 20 years after the reunification, differences in convictions continue to persist. Personal extramural sports experience and age are equally strong predictors of individual attitudes and beliefs, especially in interaction with ideological socialization.
    Keywords: communism, values, performance‐enhancement drugs, Berlin, natural experiment
    JEL: I18 K40 L83 N34 Z13
    Date: 2013–03
  21. By: Juravle, Daniel
    Abstract: Migration is an important component of contemporary society. Leaving the homeland for a better life and a well paid job is currently the most dynamic form of working population movement. For the host countries migration provides experienced cheap workforce capable of high performance. But the current economic crisis drastically reduced immigrant inflows thanks to high unemployment rates and less available work permits for migrant destination countries. Despite expectations, the return migration stayed at low levels because usually the origin country economic downturn was even worse; and the fall in remittances was also smaller than the statistics said. For Romania, emigrants represent a considerable loss because they are still reflecting the reduced capacity of the Romanian economy to generate jobs and appropriate remuneration. During the crisis, the migration outflows still continuated to grow although the remittances significally reduced, showing that they no longer go so well. Beneficiary are also the mother countries which through the money send by the citizens that work in another country they cover most of the times, a significant part of GDP. All the aspects mentioned above including the level of remittances and the effects of the migration will be analyzed in this paper.
    Keywords: labor market, emigration, remittances, emigrants, economic growth.
    JEL: E24 F22 R11 R51
    Date: 2013–03–12
  22. By: Guglielmo Maria Caporale; Luis A. Gil-Alana
    Abstract: This paper examines the dynamics of stock prices in Ukraine by estimating the degree of persistence of the PFTS stock market index. Using long memory techniques we show that the log prices series is I(d) with d slightly above 1, implying that returns are characterised by a small degree of long memory and thus are predictable using historical data. Moreover, their volatility, measured as the absolute and squared returns, also displays long memory. Finally, we examine if the time dependence is affected by the day of the week; the results indicate that Mondays and Fridays are characterised by higher dependency, consistently with the literature on anomalies in stock market prices.
    Keywords: Stock market prices; Efficient market hypothesis; Long memory; Fractional integration
    JEL: C22 G12
    Date: 2013
  23. By: Gächter, Martin (BOFIT); Riedl , Aleksandra (BOFIT); Ritzberger-Grünwald, Doris (BOFIT)
    Abstract: We analyze business cycle convergence in the EU by focusing on the decoupling vs. convergence hypothesis for central, eastern and south eastern Europe (CESEE). In a nutshell, we fnd that business cycles in CESEE have decoupled considerably from the euro area (EA) during the financial crisis in terms of both cyclical dispersion (i.e. the deviation of output gaps) and cyclical correlation. The results are mainly driven by smaller countries, which can be explained by the fact that small economies seem to have larger cyclical swings as they are more dependent on external demand, which causes a decoupling in terms of higher output gap deviations from the EA cycle in times of economic crises. At the same time, this does not necessarily affect business cycle synchronization as measured by cyclical correlations, where the strength of the linear relationship of two cycles is measured. However, despite the recent declines in the co-movement, we generally observe high correlation levels of CESEE countries with the EA after their EU accession in 2004. Finally, we find a significant decoupling of trend growth rates between EA and CESEE until the onset of the financial crises. Since the beginning of the crisis, trend growth rates have declined both in CESEE and the EA with the trend growth differential decreasing significantly from about three to below two percentage points in 2011.
    Keywords: business cycles; EMU; CESEE; optimum currency areas
    JEL: E32 E52 F15 F33 F44
    Date: 2013–02–05

This nep-tra issue is ©2013 by J. David Brown. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.