Sectoral specialisation in the EU a macroeconomic perspective

cycle volatility and business cycle synchronisation depending on the underlying mechanism. Dashed lines refer to mechanisms related
to business cycle volatility; solid arrows refer to m echanisms related to business cycle synchronisation.

1 THE RELEVANCE

OF SECTORAL

SPECIALISATION

FOR

MONETARY POLICY

through processes of sectoral re-allocation and
changes in sectoral specialisation.

Increased trade among member countries may
indeed have opposite effects on business cycle
synchronisation. On the one hand, increased
intra-industry trade can lead to more
synchronisation across member countries.
Conversely, sectoral specialisation linked to
inter-industry trade is thought to increase the
importance of industry-specific shocks on the
economy and thus to reduce synchronisation.
Nevertheless, trade integration may also have a
positive effect on business cycle
synchronisation through its positive
contribution to common aggregate demand
shocks and productivity spillovers.¹⁴ There is
empirical evidence showing that, in the context
of an integration process between countries
with similar levels of development or similar
factor endowments, the direct positive impact of
trade on synchronisation usually dominates
the negative effect of trade-induced
specialisation.¹⁵

Increased financial integration in the EU is
also likely to affect the business cycle
synchronisation across Member States.
However, in theory, the effect of intensified
capital flows is twofold. On the one hand, freer
capital flows have the potential to positively
affect synchronisation owing to psychological

14 W. Gruben, J. Koo and E. Millis (2002), “How Much Does
International Trade Affect Business Cycle Synchronization?”,
Federal Reserve Bank of Dallas Research Department Working
Paper, 0203.

15 J. Imbs (2003), “Trade, Finance, Specialisation and
Synchronization”, CEPR Discussion Paper, 3779.

ECB

Occasional Paper No. 19

July 2004

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