Specialization and Business Cycle Co-Movement in the Euro Area

Abstract

This paper explores whether similarities in production structures have been an important determinant of business cycle co-movement in the Euro Area. I construct an index of cross-country differences in industry composition using value added data from 62 sectors. Then I test whether this specialization index can explain several measures of cross-country output and employment co-movement within the European Monetary Union between 1999 and 2016. The results indicate that changes in real GDP exhibit a stronger correlation between countries producing similar goods and services. However, the composition of output cannot explain co-movement in employment or unemployment. I check the robustness of the results by dividing the sample period and by adding several control variables, including bilateral trade intensity and differences in country risk spreads.

Keywords: currency union, euro, international business cycles, production structure, specialization

JEL Classification: E30, F33