IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

What drives regional business cycles? The role of common and spatial components

  • Christian Dreger

    ()

  • Konstantin Kholodilin
  • Michael Artis

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 synchronization across the euro area is similar to that across US states. Although cyclical heterogeneity is detected, it does not indicate a serious impediment to a common monetary policy of the ECB.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www-sre.wu.ac.at/ersa/ersaconfs/ersa10/ERSA2010finalpaper317.pdf
Download Restriction: no

Paper provided by European Regional Science Association in its series ERSA conference papers with number ersa10p317.

as
in new window

Length:
Date of creation: Sep 2011
Date of revision:
Handle: RePEc:wiw:wiwrsa:ersa10p317
Contact details of provider: Postal: Welthandelsplatz 1, 1020 Vienna, Austria
Web page: http://www.ersa.org

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Morten O. Ravn & Harald Uhlig, 2001. "On Adjusting the HP-Filter for the Frequency of Observations," CESifo Working Paper Series 479, CESifo Group Munich.
  2. Michael S. Hanson & Erik Hurst & Ki Young Park, 2006. "Does Monetary Policy Help Least Those Who Need It Most?," Wesleyan Economics Working Papers 2006-006, Wesleyan University, Department of Economics.
  3. Artis, Michael J & Zhang, W, 1997. "International Business Cycles and the ERM: Is There a European Business Cycle?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 2(1), pages 1-16, January.
  4. James H. Stock & Mark W. Watson, 2003. "Understanding Changes in International Business Cycle Dynamics," NBER Working Papers 9859, National Bureau of Economic Research, Inc.
  5. M. Ayhan Kose & Christopher Otrok & Charles H. Whiteman, 2003. "International Business Cycles: World, Region, and Country-Specific Factors," American Economic Review, American Economic Association, vol. 93(4), pages 1216-1239, September.
  6. 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.
  7. Sørensen, Bent E & Yosha, Oved, 1999. "Risk Sharing and Industrial Specialization: Regional and International Evidence," CEPR Discussion Papers 2295, C.E.P.R. Discussion Papers.
  8. Michael Artis & Toshihiro Okubo, 2008. "Globalization and Business Cycle Transmission," Centre for Growth and Business Cycle Research Discussion Paper Series 110, Economics, The Univeristy of Manchester.
  9. Jeffrey A. Frankel & Andrew K. Rose, 1996. "The Endogeneity of the Optimum Currency Area Criteria," NBER Working Papers 5700, National Bureau of Economic Research, Inc.
  10. Badi H. Baltagi & Dong Li, 2006. "Prediction in the Panel Data Model with Spatial Correlation: The Case of Liquor," Center for Policy Research Working Papers 84, Center for Policy Research, Maxwell School, Syracuse University.
  11. Gabriele Tondl & Iulia Traistaru-Siedschlag, 2006. "Regional growth cycle synchronisation with the Euro Area," Papers WP173, Economic and Social Research Institute (ESRI).
  12. Marianne Baxter & Michael A. Kouparitsas, 2004. "Determinants of Business Cycle Comovement: A Robust Analysis," NBER Working Papers 10725, National Bureau of Economic Research, Inc.
  13. Michael T. Owyang & Jeremy M. Piger & Howard J. Wall, 2004. "Business cycle phases in U.S. states," Working Papers 2003-011, Federal Reserve Bank of St. Louis.
  14. Mike Artis & Hans-Martin Krolzig & Juan Toro, 2004. "The European business cycle," Oxford Economic Papers, Oxford University Press, vol. 56(1), pages 1-44, January.
  15. 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.
  16. Gerald Carlino & Robert Defina, 1998. "The Differential Regional Effects Of Monetary Policy," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 572-587, November.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:wiw:wiwrsa:ersa10p317. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Gunther Maier)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.