The Evolution of Regional Economic Interlinkages in Europe

57 Pages Posted: 14 Feb 2017

Date Written: February 14, 2017

Abstract

This paper studies the dynamics of the propagation of regional business cycle shocks in Europe and uncovers new features of its underlying mechanisms. To address the lack of high frequency data at the regional level, we propose a new method to measure time-varying synchronization in small samples that combines regime-switching models and dynamic model averaging.

The results indicate that:

(i) in just two years, the Great Recession synchronized Europe twice as much as the European Union integration process did over several decades;

(ii) Ile de France is the region acting as the main channel for the transmission of business cycle shocks in Europe; followed by Inner London and Lombardia; and

(iii) we identify a nonlinear relationship between sectoral composition and regional synchronization, which was amplified in the wake of the Great Recession.

Similarities in services sectors are primarily responsible for this nonlinear relationship.

Keywords: business cycle, sectoral composition, regime-switching, model averaging

JEL Classification: C31, C32, E32, R11

Suggested Citation

Gadea Rivas, Maria Dolores and Gómez-Loscos, Ana and Leiva-Leon, Danilo, The Evolution of Regional Economic Interlinkages in Europe (February 14, 2017). Banco de Espana Working Paper No. 1705. Available at SSRN: https://ssrn.com/abstract=2916613 or http://dx.doi.org/10.2139/ssrn.2916613

Maria Dolores Gadea Rivas (Contact Author)

University of Zaragoza ( email )

Gran Via 2
Zaragoza, 50005
Spain

Ana Gómez-Loscos

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Danilo Leiva-Leon

Central Bank of Chile ( email )

Research Department
Huerfanos 1185
Santiago
Chile

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