Eesti Pank - Bank of Estonia

We propose the analysis of the dynamics of the standard deviation of business cycles across euro area countries in order to evaluate the patterns of cyclical convergence in the European Monetary Union (EMU) for the period 1977-2002. We identify significant business cycle divergence taking place in the mid-eighties, followed by a persistent convergence period spanning most of the nineties. This convergent episode finishes roughly with the birth of the European Monetary Union. Furthermore, we use a simple autoregressive model with structural breaks in order to characterize the different phases of business cycle synchronization in terms of persistence of convergence/divergence and level of synchronization. We link the systematic trend towards synchronization of business cycles on the run-up to EMU with the process of fiscal homogeneization across euro area economies.