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Financial Linkages and Sectoral Business Cycle Synchronization: Evidence from Europe

Author

Listed:
  • Hannes Boehm

    (Halle Institute for Economic Research)

  • Julia Schaumburg

    (Vrije Universiteit Amsterdam)

  • Lena Tonzer

    (Halle Institute for Economic Research)

Abstract

We analyze whether financial integration between countries 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 1996-2017, we find that the spillover effects are positive on average but 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 some sectors are strongly affected by positive spillovers (wholesale & retail trade, industrial production), others only to a weaker degree (agriculture, construction, finance), while more nationally influenced industries show no evidence for significant spillover effects (public administration, arts & entertainment, real estate).

Suggested Citation

  • Hannes Boehm & Julia Schaumburg & Lena Tonzer, 2020. "Financial Linkages and Sectoral Business Cycle Synchronization: Evidence from Europe," Tinbergen Institute Discussion Papers 20-008/III, Tinbergen Institute.
  • Handle: RePEc:tin:wpaper:20200008
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial Integration; Business Cycle Synchronization; Industry Dynamics; Spatial Model;

    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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