Commonalities and heterogeneity in the Iberian business cycle

Abstract

This paper studies the characteristics of Spanish and Portuguese business cycles over around 150 years. We estimate a time-varying multi-country Bayesian Vector Autoregression, jointly modeling real and financial variables for Portugal and Spain to investigate convergence and synchronization. The primary evidence indicates a consistent common component linking the business cycles of the two nations. Fiscal policy harmonization and financial market integration have been successful, as seen in the converging trends of stock prices and budget deficits. However, this does not extend to credit and country spreads, where idiosyncratic dynamics continue to be significant and are unlikely to diminish in the near future, which can pose challenges in implementing further policies like the Euro.