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Business Cycle Convergence or Decoupling? Economic Adjustment of CESEE Countries during the Crisis Conference on European Economic Integration (CEEI) Helsinki, November 27, 2012 Doris Ritzberger-Grnwald, Martin Gchter and Aleksandra Riedl

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Business Cycle Convergence or Decoupling?

Economic Adjustment of CESEE Countries during the Crisis Conference on European Economic Integration (CEEI)

Helsinki, November 27, 2012 Doris Ritzberger-Grünwald, Martin Gächter and Aleksandra Riedl Oesterreichische Nationalbank Foreign Research Division

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Overview

1. Motivation 2. Business Cycle vs. Income Convergence 3. Data and Methods 4. Empirical Results

  • Cyclical heterogeneity in CESEE
  • Decoupling from the euro area?
  • Implications for the catching-up process

5. Conclusions

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Motivation

  • Wide-ranging economic coordination measures across the EU-27

− 2004/2007: EU accession of CESEE countries (Copenhagen criteria) − Since 2011:

− Fiscal policy: strengthening the Stability and Growth Pact − Structural policy: Europe 2020 growth strategy − Monetary policy: common currency area for all EU countries in the long run

⇒ Have GDP growth patterns of the CESEE countries and the euro area become more similar? ⇒ Does the adjustment process differ between large and small countries? ⇒ Has the Great Recession changed these patterns?

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Two Main Literature Strands on Convergence

1. Convergence of income (GDP per capita) – the long run

− Implies negative correlation between GDP-per-capita level and corresponding growth rates in the long run − Focuses on catching-up process of emerging market economies (EMEs)

2. Convergence of business cycles – the short run

− Focuses on short-run fluctuations around long-run trend GDP − Particularly relevant as OCA meta-criterion

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Convergence of Income:

Strong Catching-Up Process in CESEE since 2000

20 40 60 80 100 120 140 $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 E A (12) New E A (5) CE S E E (8)

CES ESEE v EE vs. EA EA c countries (2000-2011) 2011)

Source: IMF WEO Database (Oct. 2012), own calculations..

Cumulative GDP p.c. growth in % 20 40 60 80 100 120 140 $0 $5,000 $10,000 $15,000 $20,000 S mall CE S E E (S I S K HR BG E E LV LT) Large CE S E E (PL RO CZ HU)

CESEE: s small vs. large c ge countries es (2000 2000-2011) 2011)

Source: IMF WEO Database (Oct. 2012), own calculations.

Cumulative GDP p.c. growth in %

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Literature on Business Cycle Convergence

  • BC synchronization in Europe widely examined topic since the 1990s

− BC convergence in the euro area in 1990s, stabilization at high levels thereafter − E.g. Artis & Zhang (1999), de Haan et al. (2008)

  • Increased interest on CESEE region before EU enlargement

− High BC synchronization for some countries, lower for others − E.g. Fidrmuc & Korhonen (2006), Eickmeier & Breitung (2006), Darvas & Szapáry (2008) − BC fluctuations generally more pronounced in CESEE countries than in advanced economies (Benczúr & Rátfai, 2010)

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Convergence of Business Cycles:

Increased Synchronization or Decoupling?

  • Decoupling hypothesis

− Kose et al. (2012): Decoupling of EMEs from advanced economies, but BC convergence within the two groups − On the one hand… increasing bilateral trade leads to higher BC synchronization (Frankel & Rose, 1998) − But on the other hand… rapidly rising income levels in EMEs expand domestic markets and reduce dependence on advanced economies.

  • Our contribution

− CESEE – euro area − Effect of the Great Recession − Small vs. large countries

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Data and Methods

  • Data

− Quarterly real GDP (seasonally adjusted) from Q1 1999 to Q1 2012 − Country sample: euro area (12), new euro area countries (5) and remaining CESEE EU Member States, including Croatia (8) − Eurostat

  • Decomposition method

− Hodrick-Prescott (1997) filter to calculate trend (potential) GDP and cyclical components − Purely statistical decomposition technique − Caveat: Estimates at the end of the sample period can be biased

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Trend GDP versus Cyclical Component

GDP can be decomposed into

(i) trend GDP and (ii) a cyclical component

  • 3.0
  • 2.0
  • 1.0

0.0 1.0 2.0 3.0 10.8 10.9 11.0 11.1 11.2 11.3 11.4 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1 2012Q1 Cyclical Component Trend GDP GDP (in logs)

(Log) GDP, T Trend G nd GDP a and nd Cyclical Compo pone nent nts

S

  • urce: Eurostat, own calculations.

Real GDP(in logs) Cyclical component (in percentage points)

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Measures of Business Cycle Synchronization

  • BC synchronization implies…

− that the cyclical components of two countries are moving up/down simultaneously, and/or − that the cyclical components show similar values at a given point in time. − Therefore, increasing BC synchronization is also referred to as BC convergence.

  • Accordingly, we use two different measures:

− Correlation: Strength of linear relationship between two time series of cyclical components (in two-year rolling windows) − Dispersion: Standard deviation of cyclical components across the examined country sample

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More Pronounced BC Heterogeneity across CESEE than across Euro Area during Crisis

0.0 1.0 2.0 3.0 4.0 5.0 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1 E A (12) CE S E E (8)

Standa ndard de d deviations ns of c cyclical compo pone nent nts

in percentage points

S

  • urce: Eurostat, own calculations.

Dispersion

  • 1.0
  • 0.5

0.0 0.5 1.0 2001Q1 2003Q1 2005Q1 2007Q1 2009Q1 E A (12) with E A (12) Cycle CE S E E (8) with CE S EE (11) Cycle

Average C Correlation o n of i indi ndividua dual count untry cycles

correlation coefficient

S

  • urce: Eurostat, own calculations.

Correlation

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More Pronounced BC Heterogeneity across CESEE than across Euro Area during Crisis

0.0 1.0 2.0 3.0 4.0 5.0 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1 E A (12) CE S E E (8) E A (12) + New EA (5) CE S E E (8) + New E A (5)

Standa ndard de d deviations ns of c cyclical compo pone nent nts

in percentage points

S

  • urce: Eurostat, own calculations.

Dispersion

  • 1.0
  • 0.5

0.0 0.5 1.0 2001Q1 2003Q1 2005Q1 2007Q1 2009Q1 E A (12) with E A (12) Cycle New E A (5) with CE S E E (11) Cycle CE S E E (8) with CE S EE (11) Cycle New E A (5) with E A (12) Cycle

Average C Correlation o n of i indi ndividua dual count untry c cycles

correlation coefficient

S

  • urce: Eurostat, own calculations.

Correlation

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Larger Cyclical Swings in CESEE, Particularly in Smaller Countries

  • 0.15
  • 0.10
  • 0.05

0.00 0.05 0.10 0.15 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1 S I S K HR BG E E LV LT HU P L RO CZ

Indi ndividua dual CESEE (11) count untry cycles

C yclical component

S

  • urce: Eurostat, own calculations.
  • 0.15
  • 0.10
  • 0.05

0.00 0.05 0.10 0.15 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1 BE IE GR LUX NL AT P T FI DE FR IT E S

Indi ndividua dual E EA (12) c count untry c cycles

C yclical component

S

  • urce: Eurostat, own calculations.
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Smaller Economies Tend to Be More Open

EE LT LI BG SI HR SK HU RO CZ PL

20 40 60 80 100 120 140 160 180 200 100 200 300 400 500 600 700

CESEE: S Size e and O Open ennes ess of t the e ec economy (2011) 2011)

Trade (in %

  • f G

DP )

S

  • urce: AMEC

O.

R eal G DP (in bn EUR P P S )

Small Large

PT IE FI GR AT BE NL ES IT FR DE

20 40 60 80 100 120 140 160 180 200 500 1000 1500 2000 2500 3000

Euro Area ea: Size e and O Open ennes ess o

  • f t

the e ec economy (2011) 2011)

Trade (in %

  • f G

DP )

S

  • urce: AMEC

O.

R eal G DP (in bn EUR P P S )

Small Large

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Decoupling of CESEE from the Euro Area …

  • 1.0
  • 0.5

0.0 0.5 1.0 2001Q1 2003Q1 2005Q1 2007Q1 2009Q1 CE S E E (11)

Correl elation bet etween een the i e individual C CESEE (11) 11) c cycles es and the E e EA ( (12) 12) c cycle, e, 2-years r rollin lling w win indow

correlation coefficient

Quelle: Eurostat, own calculations.

0.0 1.0 2.0 3.0 4.0 5.0 6.0 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1 CE S E E (11)

Dispe persion o n of the he i indi ndividua dual C CESEE (11) cycles from EA ( (12) 12) cycle

in percentage points

S

  • urce: Eurostat, own calculations.
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… Driven by Small Countries

  • 1.0
  • 0.5

0.0 0.5 1.0 2001Q1 2003Q1 2005Q1 2007Q1 2009Q1 CE S E E (11) CE S E E S mall (S I S K HR BG E E LV LT) CE S E E Large (P L RO CZ HU)

Correl elation bet etween een the i e individual C CESEE (11) 11) c cycles es and the E e EA ( (12) 12) c cycle, e, 2-years r rollin lling w win indow

correlation coefficient

Quelle: Eurostat, own calculations.

0.0 1.0 2.0 3.0 4.0 5.0 6.0 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1 CE S E E (11) CE S E E S mall (S I S K HR BG E E LV LT) CE S E E Large (P L RO CZ HU)

Dispe persion o n of the he i indi ndividua dual C CESEE (11) cycles from EA ( (12) 12) cycle

in percentage points

S

  • urce: Eurostat, own calculations.
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The Long-Run Perspective: Great Recession Leads to Lower Growth Differential

  • 6%
  • 4%
  • 2%

0% 2% 4% 6% 8% 2001Q1 2003Q1 2005Q1 2007Q1 2009Q1 2011Q1 GDP Growth E A (12) GDP Growth CES E E (11)

Real G GDP G Growth

Annual G rowth (y-o-y)

S

  • urce: Eurostat, own calculations.
  • 1.0

0.0 1.0 2.0 3.0 4.0 5.0 2001Q1 2003Q1 2005Q1 2007Q1 2009Q1 2011Q1 Growth Differential

Growth D Dif ifferentia ial: l: CESEE (11) 11) v

  • vs. E

EA ( (12) 12)

in percentage points

S

  • urce: Eurostat, own calculations.
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The Long-Run Perspective: Great Recession Leads to Lower Growth Differential

  • 6%
  • 4%
  • 2%

0% 2% 4% 6% 8% 2001Q1 2003Q1 2005Q1 2007Q1 2009Q1 2011Q1 GDP Growth E A (12) GDP Growth CE S E E (11) Trend Growth E A (12) Trend Growth CE S E E (11)

Real GDP Growth a h and T nd Trend G nd Growth R h Rates

A nnual G rowth (y-o-y)

S

  • urce: Eurostat, own calculations.
  • 1.0

0.0 1.0 2.0 3.0 4.0 5.0 2001Q1 2003Q1 2005Q1 2007Q1 2009Q1 2011Q1 Growth Differential Trend Growth Differential

Growth D Dif ifferentia ial: l: CESEE (11) 11) v

  • vs. E

EA ( (12) 12)

in percentage points

S

  • urce: Eurostat, own calculations.
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Conclusions for the Short Run: BC Convergence

  • During the crisis, CESEE has become more heterogeneous than the

euro area

  • During the crisis, CESEE has decoupled from the euro area
  • Decoupling is mainly driven by small countries
  • Recoupling of CESEE “after” the crisis

⇒ Policy conclusion: Favorable preconditions for a common monetary policy

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Conclusions for the Long Run: Income Convergence

  • Trend growth rates declined both in CESEE and the euro area
  • Trend growth differential declined from 4 to 2 percentage points, but

remains positive

  • The still positive trend growth differential can be traced to the large

CESEE economies, in particular Poland ⇒ Policy conclusion: Catching-up continues, but to a lesser extent than before

the crisis

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Thank you for your attention!

Doris Ritzberger-Grünwald Foreign Research Division Oesterreichische Nationalbank doris.ritzberger-gruenwald@oenb.at