Determinants of regional business cycle synchronization in Greece

Abstract

AbstractWe assess the determinants of regional business cycle synchronization in Greece vis‐à‐vis the national reference business cycle, using NUTSII annual data. The computation of the time‐varying synchronization is based on the dynamic estimate of a conditional variance–covariance model and subsequently, a panel regression model is used to evaluate its determinants. The findings show that island regions, industrial structure, imports, savings and disposable income are the key determinants, based on the GVA business cycle synchronization vis‐à‐vis the national reference cycle. We also assess the determinants of employment synchronization (vis‐à‐vis the national employment level) and we find that regions with higher disposable income and public spending tend to drive the level of synchronization. Turning to the inter‐regional synchronization, we provide evidence that investments, disposable income and employment drive the GVA business cycle synchronization, whereas the employment synchronization is determined by the level of imports, disposable income and public spending, as well as by the status of regions as island economies. We further show that the Greek economic crisis during the period 2010–2018 has diminished or eliminated the effects of the aforementioned drivers, suggesting that during the said period, synchronization was mainly driven by the wider economic conditions. These findings lead to important policy implications, which are thoroughly discussed.