Regional Business Cycles Across Europe

Abstract

Large contractionary shocks such as the Great Recession or the sovereign debt crisis in Europe have rekindled interest in analyzing the overall patterns of business cycles. We study these patterns for Europe both at the national and the regional level. We first examine business cycles’ comovements and then, using Finite Mixture Markov Models, we obtain a dating of the different business cycles and identify clusters among them. We also propose an index to analyze within-country homogeneity. Our main findings are the following: (i) we find evidence of just one cluster amongst the European countries while, at the regional level, there is more heterogeneity and we identify five different groups of European regions; (ii) the groups are characterized as follows: the first contains most of the Greek regions; groups two and three include, in most cases, regions from Germany (plus a couple of regions from southern European countries in group two and some regions of the core countries in group three); group four is populated mainly by regions belonging to northern European countries; and group five is the largest and is composed of the rest of European regions; (iii) we notice that the degree of homogeneity of regional business cycles within countries is quite different; (iv) we also observe that spatial correlation increased during the convergence process towards the introduction of the euro and has taken a big leap with the Great Recession, both at country and regional level. In fact, comovements among regions have mainly increased during the last decade. These results have important implications for policymakers in the design of convergence policies at the European level and also in the design of fiscal policies to reduce regional disparities at the country level.