A1188
Title: Lost in aggregation: European, country, sectoral, and regional factors driving the gross value-added fluctuations in EU
Authors: Aikaterini Karadimitropoulou - University of Piraeus (Greece)
Krzysztof Beck - Lazarski University (Poland) [presenting]
Abstract: Ongoing monetary integration in Europe requires close monitoring of the degree of business cycle synchronization among current and potential member states in order to assess the effectiveness of common monetary policy. A Bayesian dynamic factor model is estimated on disaggregated real gross value-added data at both regional and sectoral levels. The dimension of the data allows us to define four factors: (1) European, (2) country-specific, (3) sectoral and (4) regional. It is found that, in a two-factor model, research employing aggregate data greatly overestimates the prevalence of the European factor (66\% of variance attributed to it, compared to only 26\% when using disaggregated data). Moreover, it is found that with a richer factor structure, only 9\% of the variance can be attributed to the European factor, while country, sectoral, and regional factor accounts for 26\%, 21\%, and 27\%, respectively. Therefore, it is determined that sectoral factors are the main drivers of international business cycle synchronization. The analysis in different sub-periods shows that the share of variance explained by the European factor has increased modestly, while the share explained by the sectoral factor has increased significantly at the expense of the country factor. The results support the European Commission's view on the synchronization of business cycles in the monetary union.
