Synchronization of Business Cycles in the Selected European Countries

Abstract

The synchronization of business cycles represents one of the conditions that countries have to fulfil to become part of an optimum currency area, as well as a condition for the efficient implementation of a common economic policy in these countries. This paper examines the extent to which Serbia and its neighbouring countries fulfil these conditions, taking the euro area as an optimum currency area. By applying the Hodrick-Prescott and the band-pass filters, as well as the Pearson correlation coefficient and the Spearman rank correlation coefficient, this paper examines the synchronization of business cycles in these countries. Taking Serbia as an example, the influence of the foreign trade volume between two countries on the similarity of their business cycles is tested. The results show a lower harmonization of business cycles in Serbia with those in the euro area, when compared with the selected neighbouring countries, and do not confirm the thesis on the influence of the foreign trade volume on the harmonization of business cycles.

Key words: Business cycles, Serbia, Euro area, Optimum currency area, HP filter, BP filter, Rolling correlation, Convergence.
JEL: E01, E32, F44.