A0491
Title: Lost in aggregation: European, country, sectoral, and regional factors driving the GVA fluctuations in Europe
Authors: Aikaterini Karadimitropoulou - University of Piraeus (Greece) [presenting]
Krzysztof Beck - Lazarski University (Poland)
Abstract: Ongoing monetary integration in Europe requires close monitoring of the degree of business cycle (BC) synchronization to assess the effectiveness of the common monetary policy. A Bayesian dynamic latent factor model is estimated using disaggregated real gross value added (GVA) data that includes four different types of factors: European, country, sectoral and regional. A richer factor structure reduces the variance attributed to the European factor (9\%), while country, sectoral, and regional factors account for 26\%, 21\%, and 27\%, respectively. Sectoral factors are the main drivers of international BC. Sub-periods analysis shows that the share of variance explained by the European factor increased modestly, while the share explained by the sectoral factor increased significantly at the expense of the country factor. The results support the European Commission's view on the synchronization of BC in the monetary union. Next, using Bayesian model averaging, the country factor is prevalent in regions characterized by the highest degree of specialization and belonging to countries with the least developed financial markets and most volatile exchange rates. The sectoral factor is most prevalent in regions that are part of countries with the most developed financial markets. Finally, the importance of commodity, monetary, fiscal, productivity, and terms of trade factors is examined for the European and country factors using factor-augmented vector autoregression models.
