Business cycle convergence in EMU: A second look at the second moment

We analyse the dynamics of the standard deviation of demand and supply shocks as
well as of the demand component of GDP across countries in the European Monetary
Union (EMU). This analysis allows us to evaluate the patterns of cyclical comovement
in EMU and compare them the cyclical performance of the new members of the EU
and other OECD countries. We make use of sigma-convergence methods to identify
synchronization patterns in business cycles. The Eurozone has converged to a stable
lower level of dispersion across business cycles during the end of the 80s and the beginning
of the 90s. The new EU members have also experienced a strong pattern of
convergence from 1998 to 2005, when a strong divergence trend appears. An enlargement
of the EMU to 22 members would not significantly decrease its optimality as a
currency area. There is evidence for some Europe-specific characteristics as compared
to global comovements in business cycles. (authors' abstract)