Building a synchronous common-cycle index for the European Union

Countries wanting to join a monetary union should display some commonalities of their economic indicators (inflation, public deficit, etc.) and show similarities in their business cycle fluctuations. Putting aside the political aspects, empirical studies on business cycle synchronizations are mainly based on either bivariate analyses (correlation, coherence, concordance of turning points, etc.) or factor models. This chapter lies between these two approaches. Indeed it studies the presence of business cycle synchronization for 24 countries belonging to the european union using a common cyclical feature perspective. It goes beyond a set of bivariate results, however, and suggests a multivariate strategy for determining the existence of synchronous co-movements based on a general to specific approach applied to each single-equation model. Doing so, the study identifies the european core area as those $10$ countries that display a synchronous common cycle. Finally, it provides a composite coincident index for the core area.