HOW MUCH IS THE EURO AREA COMMON CYCLE AFFECTED BY THE UK?

Abstract

To what extent is the Euro Area common business cycle affected by the inclusion of the UK into this group? To answer this question, a semi-structural model estimated by the Kalman filter, which is robust to outliers and structural breaks, is used. We look at the correlations between business cycles taking potential phase shifts into account. On the one hand, a finding – coherent with existing literature – is that adding the UK to the euro group lowers correlations within the group. On the other hand, the UK cycle is increasingly linked to the Euro Area business cycle and has statistical properties that do not differ substantially from the Euro Area cycles.

Keywords

Common business cycles optimal currency areas Kalman filter

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