Editorial
On the occasion of the 65th birthday of Governor Klaus Liebscher and in recognition of his commitment to Austria’s participation in European monetary union and to the cause of European integration, the Oesterreichische Nationalbank (OeNB) established a “Klaus Liebscher Award”. It will be offered annually as of 2005 for up to two excellent scientific papers on European monetary union and European integration issues. The authors must be less than 35 years old and be citizens from EU member or EU candidate countries. The “Klaus Liebscher Award” is worth EUR 10,000 each. The winners of the first Award 2005 were Ester Faia and Federico Ravenna. Ester Faia’s winning paper is presented in this Working Paper, while Federico Ravenna’s contribution is contained in Working Paper 98.
In this paper, Ester Raia proposes a unitary framework to interpret the links between differences in financial structures and the monetary policy regimes on the one hand, and the correlation of business cycles on the other. Using a twocountry micro-founded model with financial frictions, the author predicts that a greater financial diversity should reduce cyclical correlation under a given monetary regime, and that moving from independent monetary policies to a hard peg or a common currency should increase it, for any given degree of financial diversity. The recent experience of EMU is used to test these ideas, and it is shown that the model explains reasonably well the broad patterns of business cycle correlation observed recently among the main euro area countries.