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Financial Linkages and Sectoral Business Cycle Synchronization: Evidence from Europe

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Listed:
  • Hannes Böhm

    (Halle Institute for Economic Research (IWH))

  • Julia Schaumburg

    (Vrije Universiteit Amsterdam and Tinbergen Institute)

  • Lena Tonzer

    (Halle Institute for Economic Research (IWH)
    Vrije Universiteit Amsterdam and Tinbergen Institute)

Abstract

We analyze whether financial integration leads to converging or diverging business cycles using a dynamic spatial model. Our model allows for contemporaneous spillovers of shocks to GDP growth between countries that are financially integrated and delivers a scalar measure of the spillover intensity at each point in time. For a financial network of ten European countries from 1996 to 2017, we find that the spillover effects are positive on average and much larger during periods of financial stress, pointing towards stronger business cycle synchronization. Dismantling GDP growth into value added growth of ten major industries, we observe that spillover intensities vary significantly. The findings are robust to a variety of alternative model specifications.

Suggested Citation

  • Hannes Böhm & Julia Schaumburg & Lena Tonzer, 2022. "Financial Linkages and Sectoral Business Cycle Synchronization: Evidence from Europe," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 70(4), pages 698-734, December.
    • Handle: RePEc:pal:imfecr:v:70:y:2022:i:4:d:10.1057_s41308-022-00173-9
    DOI: 10.1057/s41308-022-00173-9
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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