Business Cycle Co-Movement in Europe: Trade, Industry Composition and the Single Currency

Nestor Azcona

Open Economies Review, 2022, vol. 33, issue 1, No 6, 139 pages

Abstract: Abstract This paper studies the reasons why business cycles are more synchronized between some European economies than between others. It analyzes the cyclical co-movement of real GDP for 325 European country-pairs over the 1995–2018 period and finds that differences in industry composition can explain disparities in business cycle synchronization better than trade or financial linkages. The role of trade is studied by considering both bilateral trade intensity and common trade relationships with third countries. Bilateral financial integration is found to have a negative effect on GDP correlations, while sharing the euro has a positive but relatively small effect. However, the euro amplifies the negative effect of industry specialization on co-movement. The results also show that using more disaggregated sectorial data substantially increases the importance of differences in industry composition.

Keywords: Business cycle co-movement; Euro; Industry composition; Specialization; Trade (search for similar items in EconPapers)
JEL-codes: E32 F44 F45 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s11079-021-09625-7

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