This paper analyzes the evolution of the degree of global cyclical interdependence over the period 1960-2005. We categorize the 106 countries in our sample into three groups-industrial countries, emerging markets, and other developing economies. Using a dynamic factor model, we then decompose macroeconomic fluctuations in key macroeconomic aggregates-output, consumption, and investment-into different factors. These are: (i) a global factor, which picks up fluctuations that are common across all variables and countries; (ii) three group-specific factors, which capture fluctuations that are common to all variables and all countries within each group of countries; (iii) country factors, which are common across all aggregates in a given country; and (iv) idiosyncratic factors specific to each time series. Our main result is that, during the period of globalization (1985-2005), there has been some convergence of business cycle fluctuations among the group of industrial economies and among the group of emerging market economies. Surprisingly, there has been a concomitant decline in the relative importance of the global factor. In other words, there is evidence of business cycle convergence within each of these two groups of countries but divergence (or decoupling) between them.

This book offers the reader a state-of-the-art overview on theory and empirics of business cycle synchronisation, structural reform and economic integration. Focusing on the ongoing integration process in the euro area and the EU, it analyses the integration process that has taken place since the 1980s and which is marked by the advent of the euro and the substantial enlargement that resulted from the accession of 12 new Member States in East and Southern Europe.

We examine economic convergence among euro area countries on multiple dimensions. While there was nominal convergence of inflation and interest rates, real convergence of per capita income levels has not occurred among the original euro area members since the advent of the common currency. Income convergence stagnated in the early years of the common currency and has reversed in the wake of the global economic crisis. New euro area members, in contrast, have seen real income convergence. Business cycles became more synchronized, but the amplitude of those cycles diverged. Financial cycles showed a similar pattern: sychronizing more over time, but with divergent amplitudes. Income convergence requires reforms boosting productivity growth in lagging countries, while cyclical and financial convergence can be enhanced by measures to improve national and euro area fiscal policies, together with steps to deepen the single market.

The integration of goods and financial markets has progressed on a global scale in recent years. Thus, the cyclical patterns in the world economy may have changed too. Against this background, experts in international economics analyze the synchronization of business cycles and their volatility in this book. Is there an European business cycle? What is the role of multinational corporations and monetary policy in transmitting business cycles? Further, they discuss the need and feasibility of internationally coordinating monetary and exchange rate policies and the quantitative effects of tax competition.

The Maastricht Treaty, signed in December 1991, set a timetable for the European Community's economic and monetary union (EMU) and clearly defined the institutional policy changes necessary for its achievement. Subsequent developments have demonstrated, however, the importance of many key issues in the transition to EMU that were largely neglected at the time. This volume reports the proceedings of a joint CEPR conference with the Banco de Portugal, held in January 1992. In these papers, leading international experts address the instability of the transition to EMU, the long-run implications of monetary union and the single market for growth and convergence in Europe. They also consider the prospects for inflation and fiscal convergence, regional policy and the integration of financial markets and fiscal systems. Attention focuses on adjustment mechanisms with differentiated shocks, region-specific business cycles and excessive industrial concentration and the cases for a two-speed EMU and fiscal federalism.

Traditionally, economic growth and business cycles have been treated independently. However, the dependence of GDP levels on its history of shocks, what economists refer to as “hysteresis,” argues for unifying the analysis of growth and cycles. In this paper, we review the recent empirical and theoretical literature that motivate this paradigm shift. The renewed interest in hysteresis has been sparked by the persistence of the Global Financial Crisis and fears of a slow recovery from the Covid-19 crisis. The findings of the recent literature have far-reaching conceptual and policy implications. In recessions, monetary and fiscal policies need to be more active to avoid the permanent scars of a downturn. And in good times, running a high-pressure economy could have permanent positive effects.