DP1191 | International Business Cycles and the ERM: Is there a European Business Cycle?

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Successful fixed exchange rate systems impose policy disciplines which are likely to lead to conformity in the business cycles of the participating countries. This conjecture is borne out in the present paper by the evidence adduced in it that the business cycle affiliation of ERM member countries has shifted from the United States to Germany since the formation of the ERM. This effect is bolstered by growing links in trade and finance between the European countries. The United Kingdom is conspicuous among these in that its business cycle affiliation did not change.