National Policies and Local Economies: Europe and the United States

Mario Forni and Lucrezia Reichlin

No 1632, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper studies the synchronization of output fluctuations in European regions and US counties. We extend the two component dynamic factor model à la Sargent and Sims (1977) by introducing an intermediate-level shock, which is common to all regions (counties) in each country (state), but it is not common to Europe (United States) as a whole. We build on Forni and Reichlin (1995, 1996) to propose a simple method of estimation which is based on Law of Large Numbers results and exploits the large cross-sectional dimension of the data set. The empirical findings show that Europe has a level of integration similar to that of the United States. In general, we find that the national dimension in Europe is not very important: around 75% of output variance is explained by global and purely local dynamics. Similar numbers are found for US counties and US states. The study of the dynamic profile of the components, however, shows that Europe, unlike the United States, has no traditional business cycle. Shocks are very persistent and the bulk of the variance is in the long run. We also find a European core of regions with a particularly high level of integration. The core is not defined by a set of nations, however, but by regions belonging to different countries.

Keywords: Business Cycle; Dynamic Factor Model; European Integration (search for similar items in EconPapers)
JEL-codes: C51 E32 O30 (search for similar items in EconPapers)
Date: 1997-04
References: Add references at CitEc
Citations: View citations in EconPapers (31)

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=1632 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: National policies and local economies: Europe and the United States (1999)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:1632

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... ers/dp.php?dpno=1632

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().