Convergence and Common Cycles in the European Union

Abstract

An important question facing the European Union is whether the degree of economic convergence among the member states is sufficient to ensure the smooth operation of a unified monetary system. In this paper we use the common features test to identify the degree of short-run (cyclical) convergence among the larger EU countries. Our results suggest that GDP growth, exchange rates and nominal interest rates exhibit common cyclical features (represented by common serial correlation features), In contrast, we find that there are generally no common features in real interest rate movements.