Financial Linkages and Sectoral Business Cycle Synchronization: Evidence from Europe

Abstract

We analyze whether financial integration between countries leads to converging or diverging business cycles using a dynamic spatial model. Our model allows for contemporaneous spillovers of shocks to GDP growth between countries that are financially integrated and delivers a scalar measure of the spillover intensity at each point in time. For a financial network of ten European countries from 1996-2017, we find that the spillover effects are positive on average but much larger during periods of financial stress, pointing towards stronger business cycle synchronization. Dismantling GDP growth into value added growth of ten major industries, we observe that some sectors are strongly affected by positive spillovers (wholesale & retail trade, industrial production), others only to a weaker degree (agriculture, construction, finance), while more nationally influenced industries show no evidence for significant spillover effects (public administration, arts & entertainment, real estate).

GDP‐network CoVaR: A tool for assessing growth‐at‐risk

“…The goal of our paper is to measure global interconnectedness applying the tools of financial systemic risk measurement to the evolution of international economic activity. Before the financial crisis, and thereafter, comovement of international output, inflation, interest rates, and equity have become significantly pronounced due to increased economic and financial integration, with important implications for macroeconomic policy spillovers across countries (among the others, see Aguiar-Conraria et al, 2016;Böhm et al, 2020;Guerini et al, 2019). Indeed, international macroeconomic synchronization poses significant challenges to policy-makers, who seek local macroeconomic stability, and international regulators, whose objective is the mitigation of systemic risk.…”