Business cycle synchronization (BCS) is crucial for effective common monetary policy in the Eurozone. However, the impact of capital market integration on BCS is ambiguous in the literature. In this paper, we quantify the different channels through which capital mobility affects BCS, considering dynamic panel framework accounting for model uncertainty, reverse causality, and contagion. Four different channels are examined: exuberance of business cycles through short‐run flows, risk‐sharing‐induced specialization, international value chain integration resulting from foreign direct investment, and contagion. The results show that the overall impact of capital mobility on BCS is positive in the EU.

The last twenty years have brought a bulk of inconsistent results on the determinants of business cycle synchronization (BCS). Researchers have usually focused their attention on a limited set of possible determinants, not accounting for model uncertainty. For these reasons, Bayesian Model Averaging has been applied in this paper to the dataset with 43 potential determinants of BCS for the EU. There is strong evidence to claim that migration, exchange rate variability, similarity of production structures, TFP shocks, similarity in exchange rate policy, intra-industry trade, risk sharing, and capital mobility are robust determinants of BCS. Some well-established determinants such as bilateral trade, monetary policy similarity, gravity variables, and participation in a monetary union and free trade area have turned out to be fragile. The structure of trade is more important for BCS than its magnitude, as intra-industry trade and structural similarity are taking explanatory power away from the bilateral trade.

This article investigates the degree of financial integration of the Eastern European countries with global and regional financial markets and compares it with the core of the euro area. A Bayesian dynamic factor model was utilized to uncover global, regional and country factors driving the co-movement of rates of return of stock indexes. In the case of the Eurozone, the role of the country and international factor was extremely stable over the analyzed period. The composition of the international factor changed over time with the share of the global factor increasing during the time of the global financial crisis. The share of the country factor in the EMU was around 10%, while it was around 20% in Visegrad 4, indicating very strong international ties between the capital markets.

The aftermath of the crisis in Europe renewed the interest in the comovement business cycles and the ability of the European Central Bank (ECB) to implement a common monetary policy. Depending on the examined time period, the sample of countries and the utilized methodology, the research shows evidence of both convergence and decoupling of European business cycles. The present paper extends this research agenda by applying Bayesian dynamic latent factor models to the time series of GDP growth and the inflation of the Eurozone and Central and Eastern Europe (CEE) countries from 2000 till 2018. The results show evidence of two distinct business cycles in the Eurozone and the CEE, as well as the progressing decoupling in the European Union and convergence within the Eastern and Western Europe. Comovement of inflation has been slowly declining in the Eurozone, suggesting decreasing effectiveness of the EBC in following the inflation target in the entire euro area.