Abstract
AbstractWe used a Bayesian dynamic factor model (BDFM) to examine the share of variance explained by the European and country factors for 59 regions in Eurozone countries in the period from 1992 to 2020. The BDFM output facilitated the construction of a criterion that enables the assessment of the cost of participation in the European Monetary Union, which is directly related to the optimum currency area theory. Over the examined period, we observed business cycle divergence, with 46 regions experiencing a drop in the share of variance explained by the European factor from 1992–2005 to 2006–2020. However, the analysis over shorter time spans demonstrated that all the regions decoupled from the European business cycle. The results contradict the predictions of "The European Commission View". On the one hand, two predictions stemming from "The Krugman View" are supported by the results: the European regions experienced a slight increase in sectoral specialization, and they experienced business cycle divergence. On the other hand, the data does not support the notion that the ongoing specialization was the underlying cause of this divergence.
Publisher
Springer Science and Business Media LLC
Reference60 articles.
1. Alfonso A, Furceri D (2008) EMU enlargement, stabilizations costs and insurance mechanisms. J Int Money Financ 27(2):169–187
2. Alvarez L, Gadea M, Gómez Loscos A (2021) Cyclical patterns of the spanish economy in europe. Documentos Ocasionales 2103, Banco de España
3. Artis DCM, Kholodilin K (2011) What drives regional business cycles? The role of common and spatial components. Manch Sch 79(5):1035–1044
4. Artis MJ, Okubo T (2009) The UK Intranational Trade Cycle
5. Aviat A, Bec F, Diebolt C, Doz C, Ferrand D, Ferrara L, Heyer E, Mignon V, Pionnier PA (2021) Dating business cycles in france: A reference chronology. Working paper, French Economic Association