Intereconomics 2017 | 4
Optimum Currency Area
interest rates at the peak (and lower ones at the trough)
of the cycle than country A. The divergence created by
different amplitudes thus appears mostly at the extremes
of the cycle.
Consequently, these considerations suggest that the em-
phasis on correlations that is prevalent in the literature is
sensible only if countries have cycles that do not coincide
but have similar amplitudes (and lengths). Figure 2 de-
picts the case of two countries whose shifted cycles have
a correlation coefﬁ cient of zero. In this case, the differ-
ences in the cyclical positions remain constant for a long
period between the peak of one cycle and the trough of
the other, but then go to zero and change sign.
A comparison between these two ﬁ gures provides a possi-
bility to discriminate between the two hypotheses: if differ-
ences in amplitude are the real problem, large divergences
should appear mainly at the peak and trough of the cycle.
By contrast, if the problem is the shift in business cycles,
then the divergences in cyclical positions should persist for
most of the time. Judging from the way the policy discus-
sion has evolved over time, one can conclude that different
amplitudes might indeed have been a key factor, since dif-
ferences in cyclical positions seem to play a smaller role
today than they did at the peak of the crisis.
Furthermore, differences in amplitude can exert a mag-
nifying impact on any occurring desynchronisation. Fig-
ure 3 illustrates this effect with three lines: (1) the com-
mon euro area cycle, (2) the cycle of a country that has
the same amplitude as the common cycle but is shifted
by half a cycle and (3) a country with an amplitude that is
twice as large as the common cycle and is shifted by half
a cycle. Although the correlation coefﬁ cient between the
national and the euro area cycle is in both cases equal
(to zero), it becomes apparent that the difference between
the national and the euro area cycle is not the same when
the amplitude changes.
Does the euro area constitute an optimum currency ar-
There is a vast body of literature on business
cycle synchronisation as a key OCA criterion.
most studies have focused on co-movements in the cycle
as a measure of synchronisation. This focus can be mis-
leading if the amplitudes of the cycle are very different, as
illustrated in Figure 1, which shows two countries sharing
the same (highly stylised) business cycle, but whose am-
plitudes differ signiﬁ cantly. This leads to two implications:
the two series have a correlation coefﬁ cient of 1, but large
differences appear at the peak and trough of the cycle.
These differences can lead to the same types of com-
mon policymaking problems as if the two cycles were not
correlated, as the high beta country B would need higher
1 This article draws from and extends previous work by the authors on
the synchronisation of business cycles in the euro area. For a similar
exposition of this particular argument, see A. Belke, C. Domnick,
D. G r o s : Business Cycle Synchronization in the EMU: Core vs. Pe-
riphery, in: Open Economies Review, forthcoming.
2 The canonical reference is T. Bayoumi, B. Eichengreen: Shock-
ing aspects of European monetary integration, in: F. Torres, F. Gia-
vazzi (eds): Adjustment and Growth in the European Monetary Un-
ion, Cambridge 1993, Cambridge University Press; a timely update is
provided by N.F. Campos, P. Macchiarelli: Core and Periphery
in the European Monetary Union: Bayoumi and Eichengreen 25 years
later, in: Economics Letters, Vol. 147, October 2016, pp. 127-130. For
a recent survey of the literature, see J. De Haan, R. Inklaar, R.
Jong-A-Pin: Will business cycles in the Euro area converge? A
critical survey of empirical research, in: Journal of Economic Surveys,
Vol. 22, No. 2, 2008, pp. 234-273.
Ansgar Belke, Clemens Domnick and Daniel Gros
Business Cycle Desynchronisation: Amplitude
and Beta vs. Co-movement
A high degree of correlation among the business cycles of individual countries is usually seen
as a key criterion for an optimum currency area. However, the elasticity with which countries
react to the common cycle is equally important. A country with a non-unitary growth elasticity
relative to the common area will experience cyclical divergences at the peak and trough of
the common cycle. Despite being characterised by highly correlated business cycles, the euro
area suffers from widely differing amplitudes.
Ansgar Belke, University of Duisburg-Essen, Ger-
Clemens Domnick, University of Duisburg-Essen,
Daniel Gros, Centre for European Policy Studies,