This paper analyses synchronization, both across and between business and financial cycles (growth and classical) in a subset of 10 countries representative of the Economic and Monetary Union. Employing an extended data set from 1960 to 2013, we find evidence of synchronization across financial cycles. In case of business cycles, we find contrasting results: There is significant synchronization across growth cycles but no evidence of a common classical cycle. This confirms, first, that economic and financial variables in the Economic and Monetary Union behave differently and, second, that synchronization in business cycles arises from synchronized deviations from the trend, but the underlying macroeconomic fundamentals are not in synch. Furthermore, we adopt a novel approach to break down our full sample period into smaller subperiods to follow the evolution of synchronization over time. Our results highlight the role played by the monetary union in further increasing macroeconomic divergences.

This paper explores the possibility that financial depth may have an asymmetric impact on macroeconomic volatility by affecting its "good" and "bad" components in different ways.While "good" volatility refers to positive shocks to gross domestic product, consumption and investment growth, "bad" volatility denotes negative fluctuations in these macroeconomic indicators. Dynamic panel regressions in a sample of 97 countries over the period 1960-2010 provide evidence of asymmetry on three main grounds. First, financial depth reduces good volatility but does not have much impact on bad volatility except that it reduces some bad volatility of consumption. Second, though financial depth reduces both good and bad volatility of consumption, the reduction in the good component is much greater. Third, the impact of financial depth on macroeconomic volatility varies across sectors. Particularly in low-income economies, financial depth enables better consumption decisions but poorer investment choices. These results have important policy implications. K E Y W O R D S bad volatility, dynamic panel analysis, financial development, good volatility, macroeconomic volatility, semi-variance J E L C L A S S I F I C A T I O N E39; E44; G11; O16 406 | HUSSAIN | 407HUSSAIN enables policymakers to accurately assess the real costs and benefits of financial depth and understand how financial depth affects macroeconomic volatility. It also provides a comprehensive and rigorous basis for embarking on an optimal financial development policy and financial sector reform.Following this overview, Section 2 presents the data and methodology. Section 3 reports the dynamic panel regression results analysing the impact of financial depth on good versus bad volatility. Subsample regressions provide further insight into how this relationship may differ across low-, middle-and high-income economies. The possibility of a nonlinear relationship between financial depth and the bad component of macroeconomic volatility is also investigated. Section 4 provides robustness checks. Section 5 concludes and draws policy implications from the main findings.