The paper aims to examine in empirical terms business cycle synchronization in the Visegrad Four (V4) countries. Business cycle is defined as a short-term variation in real output around potential output. The presence of asymmetric shocks indicates asynchronous business cycles, while synchronous cycles imply that the costs of the common monetary policy are relatively low.
The net advantage of euro area membership for V4 countries depends on the relative size of such costs. The paper analyzes the business cycle synchronization by directly calculating cross correlations, by calculating cross correlations from primary impulses, and finally by calculating output gap component correlations from common and country-specific shocks.
The results of the paper suggest that, in regard to the output gap, the results of all three methods are approximately the same. Main findings are as follows:
before 2001 the business cycles of the V4 countries were not synchronized with the euro area (low or negative correlations)
between 2001 and 2007 the correlations entered positive territory as the V4 countries joined the EU and trade between the V4 countries and the euro area increased
during the economic crisis of 2008–2009, synchronization increased still further
The calculation of the impact of country-specific shocks on output gap differences showed that, as a consequence of country-specific shocks, the deviation from the euro area business cycle is far greater in Slovakia than in the other V4 countries, which represents a risk.
In general, however, the costs of the common monetary policy will decrease, as the synchronization of business cycles increases. The varying impact of different factors on synchronization should, though, be acknowledged. While integration – mainly intra-industry trade – has the potential to synchronize the business cycle in the long run, to achieve fast convergence requires a convergence of the fiscal policies and reduction in labor market rigidities.