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What Drives Regional Business Cycles? The Role Of Common And Spatial Components

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  • MICHAEL ARTIS
  • CHRISTIAN DREGER
  • KONSTANTIN KHOLODILIN

Abstract

The degree of comovement of economic activity across states or regions is an issue of utmost importance to policymakers. Asymmetric business cycles are often seen as an impediment to the formation of a common currency area. However, it has been argued that a common monetary policy in itself could reduce the cyclical asymmetry. We examine real business cycle convergence for 41 euro area regions and 48 US states. By looking at the regional dimension, a larger information set can be exploited and might offer new insights. Regions tend to be more open to trade than countries and the degree of specialisation is usually higher than at the national level. If diverging trends cancel out in the aggregate, policy conclusions based on national evidence could be misleading. Regional comovements may be caused not only by common business cycles, but also by other factors due to location. They can be linked to industrial structures and migration, but can also reflect non-economic factors like habits, heritage, and culture. Spatial spillovers have been largely neglected in previous studies, thereby creating omitted variable bias. A panel model allowing for spatial correlation is a convenient way to capture these effects. This analysis is also relevant from a monetary policy point of view. By comparing the synchronization of economic fluctuations in US states and comparable euro area regions, the perspectives of a common monetary policy in Europe can be assessed. The US provides a natural benchmark in this respect. Both the US and the euro area share similar socio-economic characteristics, regarding the size, the level of development, culture etc. The results obtained by a panel model with spatial effects indicate that the impact of national business cycles for the regional development has been rather stable over the past two decades. Hence, a tendency for convergence in business cycles often detected in country data is not confirmed at the regional level. The pattern of synchroniza

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

Article provided by University of Manchester in its journal The Manchester School.

Volume (Year): 79 (2011)
Issue (Month): 5 (09)
Pages: 1035-1044

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Handle: RePEc:bla:manchs:v:79:y:2011:i:5:p:1035-1044

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  1. Michael T. Owyang & Jeremy Piger & Howard J. Wall, 2005. "Business Cycle Phases in U.S. States," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 604-616, November.
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  6. Artis, Michael & Okubo, Toshihiro, 2009. "Globalization and business cycle transmission," The North American Journal of Economics and Finance, Elsevier, vol. 20(2), pages 91-99, August.
  7. Uhlig, H.F.H.V.S. & Ravn, M., 1997. "On Adjusting the H-P Filter for the Frequency of Observations," Discussion Paper 1997-50, Tilburg University, Center for Economic Research.
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  10. Artis, M. & Krolzig, H.-M. & Toro, J., 1999. "The European Business Cycle," Economics Working Papers eco99/24, European University Institute.
  11. Frankel, Jeffrey A & Rose, Andrew K, 1998. "The Endogeneity of the Optimum Currency Area Criteria," Economic Journal, Royal Economic Society, vol. 108(449), pages 1009-25, July.
  12. Gabriele Tondl & Iulia Traistaru-Siedschlag, 2006. "Regional growth cycle synchronisation with the Euro Area," Papers WP173, Economic and Social Research Institute (ESRI).
  13. Mark D. Partridge & Dan S. Rickman, 2005. "Regional cyclical asymmetries in an optimal currency area: an analysis using US state data," Oxford Economic Papers, Oxford University Press, vol. 57(3), pages 373-397, July.
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  15. Fratantoni, Michael & Schuh, Scott, 2003. " Monetary Policy, Housing, and Heterogeneous Regional Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(4), pages 557-89, August.
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Cited by:
  1. Salá Rios, Mercé & Farré Perdiguer, Mariona & Torres Solé, Teresa, 2011. "El ciclo económico de Cataluña. Un análisis de la simetría respecto a España y a la UEM/Catalonia's Business Cycle. An Analysis of the Symmetry in Relation to Spain and the EMU," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 29, pages 913 (24 pá, Diciembre.
  2. HIRATA Hideaki & Ayhan KOSE & Christopher OTROK, 2013. "Regionalization vs. Globalization," Discussion papers 13004, Research Institute of Economy, Trade and Industry (RIETI).
  3. Julian Ramajo & Miguel A. Marquez & Geoffrey J.D. Hewings, 2013. "Spatio-temporal Analysis of Regional Systems: A Multiregional Spatial Vector Autoregressive Model for Spain," ERSA conference papers ersa13p159, European Regional Science Association.
  4. Emilio Espino & Julian Kozlowski & Juan M. Sánchez, 2013. "Regionalization vs. globalization," Working Papers 2013-002, Federal Reserve Bank of St. Louis.

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