which is probably related to the limited changes
in sectoral specialisation.
Therefore, economic integration does not
necessarily lead to a monotonic relationship
with sectoral specialisation. To the extent that
economic integration raises the level of per
capita income, particular patterns of changes in
sectoral specialisation are possible. For
instance, combining different hypotheses, Imbs
and Wacziarg11 conclude that economies may be
able to undergo different stages of
specialisation as income per capita grows.
Countries may initially diversify but will then
re-specialise at a relatively higher level of
income per capita. However, even without
changes in overall sectoral specialisation, one
can expect that some sectoral re-allocation will
take place to account for the significant changes
in the economic environment.
1.4 SECTORAL DETERMINANTS OF BUSINESS
CYCLE FLUCTUATIONS
Differences in sectoral specialisation across
Member States have the potential to affect both
the volatility and synchronisation of business
cycles in the EU. In theory, the impact of
changes of sectoral specialisation on business
cycle characteristics is ambiguous and depends
on the particular channels that underlie the
change in the composition of the production
structure (see Chart 2).
Business cycle volatility in the EU has
experienced a marked decline over the last two
decades. One suggested explanation for this
regards the impact of stability-oriented policies
that may have resulted, for instance, in the
stabilisation of low inflation expectations (not
shown in Chart 2). In addition, the decline in
business cycle volatility can be related to
additional factors:
- A declining share of stock building (which is
highly pro-cyclical) as a share of GDP.12
- This in turn could be explained by a shift of
production towards the services sector
following increased global restructuring of
manufacturing industries and improved
inventory management. However, the
increased share of services results partly
from outsourcing processes, and outsourced
services are likely to follow the more volatile
cycle of industry. Thus the effect of services
on overall volatility is ambiguous.
- In addition, trade deepening has also often
acted to dampen the amplitude of cycles
following the cushioning effect of a positive
covariance between domestic demand and
imports (“demand channel”); this effect,
however, may have been reduced by the
increasing share of non-traded services in
GDP.
- Increased financial market integration may
have had two opposite effects on business
cycle volatility: while deepened capital
markets make it possible to insure against
shocks and to reduce volatility, a rise in the
financial multiplier and contagion across
countries and sectors may positively
contribute to business cycle volatility.
Meanwhile, there is evidence pointing to
negative effects of differences in sectoral
composition across countries on business cycle
synchronisation.13 However, as seen in the
preceding section, sectoral specialisation can in
itself be the result of trade and financial
integration. Consequently, economic
integration is likely to affect business cycle
synchronisation, either directly through
increased economic linkages or indirectly
11 J. Imbs and R. Wacziarg (2003), “Stages of Diversification”,
American Economic Review, 93/1, pp. 63-86.
12 T. Dalsgaard, J. Elmeskov and C. Park (2002), “Ongoing
Changes in the Business Cycle - Evidence and Causes”, OECD
Economics Department Working Paper, 315; O. J. Blanchard and
J. Simon (2001), “The Long and Large Decline in U.S. Output
Volatility”, Brookings Papers on Economic Activity, 1/2001, pp.
135-174.
13 See J. Imbs (2001), “Co-fluctuations”, CEPR Discussion Paper,
no 2267, and J. Imbs (2001), “Sectors and the OECD Business
Cycle”, CEPR Discussion Paper, no 2473 and references therein.
ECB
Occasional Paper No. 19
July 2004