A class of growth theories explains the formation of convergence clubs among economies by differences in certain initial conditions. So far, it has not been tested empirically whether these initial conditions are indeed responsible for the appearance of multiple steady state equilibria. In this paper we tackle this issue by considering data on 206 European regions' per capita income from 1990 to 2005. We employ a novel regression based convergence test developed by Phillips and Sul (2007) that enables the endogenous determination of convergence clubs. As this method requires cross-section observations to be independent, we first apply a spatial filtering technique in order to remove the spatial component from the data. Results strongly support the existence of convergence clubs, indicating that European regions form five separate groups converging to their own steady state paths. Moreover, estimates from an ordered probit model reveal that the level of initial conditions, such as human capital and per capita income, plays a crucial role in determining the formation of convergence clubs among European regions.
Foreign direct investment (FDI) has increasingly shifted toward the service sector. This change in the industrial composition of FDI and the non-tradable nature of services may have altered the importance of location factors for investment decisions. To capture potential changes in FDI determinants, a contrasting sectoral analysis is performed. Based on FDI stock data from eight new EU member states for the period 1998-2004, we implement a dynamic panel approach allowing the speed of adjustment to the equilibrium investment level to vary across sectors. Results support our assumption that investment into the service sector, which is characterized by low installation costs, adjusts much faster to its desired level than manufacturing FDI. Thus, government interventions to attract FDI are likely to boost the service sector immediately while having a slower impact on manufacturing FDI. Furthermore, as services are mostly non-tradable, FDI into this sector is largely based on market-seeking motives while FDI in the manufacturing sector is also driven by international price competitiveness measured by real unit labour costs.
JEL classification: E02 E32 E58 F15 F33 a b s t r a c tWe examine whether the introduction of the euro had a significant impact on the synchronization of business cycles among members of Economic and Monetary Union (EMU). Empirical evidence on this relationship is rare so far and suffers from methodical weaknesses, such as the absence of time variability, which is crucial for addressing this issue. Using a synchronization index that is constructed on a year-by-year basis (1993-2011), we uncover a strong and robust empirical finding: the adoption of the euro has significantly increased the correlation of member countries' business cycles above and beyond the effect of higher trade integration. Thus, our results substantially strengthen the conclusion by Frankel and Rose (1998), i.e. a country is more likely to satisfy the criteria for entry into a currency union ex post rather than ex ante. Remarkably, however, this reasoning is even verified when controlling for the effect of increased trade linkages implied by entering a currency union.
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