Interregional Trade, Specialization, and the Business Cycle: Policy Implications for the EMU

Abstract

In this paper we analyse the effects of trade and specialisation on regional business cycle co-movement in the Economic and Monetary Union. Using a novel and unique bilateral regional trade dataset, we find that regions with stronger trade linkages and similar economic structures have more synchronized cycles. These results suggest that policies fostering regional specialization at the European level may reduce business cycle synchronization across regions and countries. This, in turn, might generate macroeconomic tensions in the common currency area. On the other hand, market integration policies can foster regional cycle synchronization and favour the functioning of the monetary union.