Specialization and Business Cycle Co-Movement in the Euro Area

This paper explores whether similarities in production structures have been an important determinant of business cycle co-movement in the Euro Area. We constructed an index of cross-country differences in industry composition using value added data from 62 sectors. Then we tested whether this specialization index can explain several measures of cross-country output and employment co-movement within the European Monetary Union between 1999 and 2016. The results indicate that changes in real gross domestic product exhibit a stronger correlation between countries producing similar goods and services. However, the composition of output cannot explain co-movement in employment or unemployment. We checked the robustness of the results by dividing the sample period and by adding several control variables, including bilateral trade intensity and differences in country risk spreads.