Question

According to a recent report of the IMF on economic convergence in the Euro Area, “…business cycles have become increasingly synchronized across euro area countries.” However, the report goes on to state that “…the amplitude of business cycles has diverged…Hence, while business cycles have become more synchronized during EMU (economic and monetary union), the size of these fluctuations has diverged.” What are the implications of these findings for policymakers at the European Central Bank?

Answer 1

As per studies we can say that there is nomimal convergence in inflation and interst rates and due to the common currency acceptance in the euro area real convergence of per capita income has not occured . In the wake of the global economic crisis income convergence diverged in the euro area and henceforth business cycles became more synchronized with diverged amplitude.

Inspite of higher correlation of business cycles with euro areas than area outside business cycle amplitude diverged which is a great cause of thinking. As per study the implication of these divergence are-

• Full synchronization which is achieved with zero difference and lower number reflects less divergence must be greater due to different factors prevailing in the economy.
• Larger divergence in the business cycle was greatly noticed after the crisis hit the euro areas which diverged the per capita income in the euro area .
• Business cycles have become more synchronized during the EMU but fluctuations in these cycles diverged , this implies mix concepts i.e. while the high degree of cyclical synchronization ensures that the common monetary policy points in the right direction for most EMU member states , the divergence in amplitude means that the optimal degree of tightening or loosening of macroeconomic policies would differ for different countries.