UK in or UK out? : a common cycle analysis between the UK and the Euro zone

Abstract

We use a structural model estimated by the Kalman filter in order to extract the common cycle for different groups of OECD countries. We try to evaluate to what extent the Euro zone common cycle is affected by the inclusion of the UK into the group. An important result of this work is that adding the UK to the Euro group does not lead to a greater heterogeneity of the group as a whole. Besides, the UK business cycle is not much different from Euro zone cycles. Another point is that the influence of the UK on the `Euro plus UK' common cycle is less obvious for output than for consumption, public expenditures or investment series. This suggests the importance of taking into account the components of output when analysing business cycles.