Common stationary and non-stationary factors in the euro area analyzed in a large-scale factor model

Sandra Eickmeier

No 2005,02, Discussion Paper Series 1: Economic Studies from Deutsche Bundesbank

Abstract: In this paper we rely on techniques recently developed by Bai and Ng (2004a) to estimate common euro-area stationary and non-stationary factors using a large-scale dynamic factor model. We find that euro-area economies share four non-stationary factors or trends and one stationary factor. By means of rotation techniques, we estimate a euro-area business cycle which is a fairly good match to EuroCOIN, the euro-area coincident business cycle indicator published by the CEPR. Fluctuations of common euro-area factors mainly reflect variations of German and French real economic activity as well as of producer prices and financial prices (long-term interest rates and/or real effective exchange rates) in various countries. As concerns the transmission channels, macroeconomic shocks seem to proliferate in the euro area more strongly through trade, exchange rates and long-term interest rates than through stock prices. Among the external driving forces, shocks to US economic activity seem to be more strongly linked to shocks to the euro-area factors than oil price shocks. We finally find evidence of mild overall convergence; results for individual countries are mixed.

Keywords: Dynamic factor models; factor rotation; common trends; international business cycles; international transmission channels (search for similar items in EconPapers)
JEL-codes: C32 C50 F02 F40 (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-eec and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdp1:2936

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