It is all about demand and supply: a dualistic view of the euro area business cycle

Davide Brignone () and Marco Mazzali ()
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Davide Brignone: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Marco Mazzali: University of Bologna

No 1124, Bank of England working papers from Bank of England

Abstract: What drives business cycle fluctuations in the euro area (EA)? To answer this question, we build a rich, high-dimensional dataset of quarterly time series covering both EA aggregates and its major member countries. We find that just two shocks account for the bulk of the EA’s cyclical dynamics, and that they map cleanly onto standard demand and supply disturbances, consistent with textbook macroeconomic theory. Beyond this aggregate result, we uncover a high degree of synchronization in how member states respond to these shocks, highlighting the presence of a shared underlying cycle across the region. We also provide a historical decomposition of key EA macro variables based on the identified demand and supply components, with a particular focus on the recent inflation surge. Our findings show that supply-side factors dominated the initial phase of inflation through mid-2022, while demand-side pressures intensified and became increasingly important from mid-2022 onward.

Keywords: Business cycle; identification; frequency domain; euro area economy; dynamic factors; inflation. (search for similar items in EconPapers)
JEL-codes: C38 E32 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2025-04-25
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:1124

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