Business Cycle Dynamics in the Euro Area∗

We investigate the properties of business cycle dynamics in the euro area with the aid of structural VAR models. The role of world, euro area and country-specific shocks in business cycle dynamics of the euro area are assessed. We find that euro area shocks became a much more important factor behind cyclical fluctuations in many euro area countries recently. Moreover, while the great moderation in the euro area is found to be related to changes corresponding to world and country-specific shocks, euro area shocks do not play a significant role in this phenomenon. Finally, the differentials of output gaps between the entire euro area and each member country are driven mainly by country-specific shocks. The same shocks also play the largest role in the great moderation of the differentials observed recently. JEL classification: C32, E3