spillovers that raise the international correlation
of developments on national financial markets.
On the other hand, financial integration
provides a means for cross-country risk-
sharing that makes it possible to insure a
country’s national income against country-
specific productivity shocks. The increased risk
sharing would raise the business cycle
synchronisation of GNP while the induced
sectoral specialisation may lead to a decreased
cyclical synchronisation of GDP.
Finally, an important feature of business cycles
concerns the co-movement of different sectors
within one country that occurs despite
substantial differences in trend growth paths
and degrees of volatility.16 Sectoral co-
movement may be related to aggregate shocks
when sectors display similar reaction patterns.
If sectoral co-movements are strong enough,
individual sectors will display a common
pattern despite the absence of any correlation
across sector-specific shocks.17 The extent to
which economies are characterised by sectoral
co-movement is of potential importance for
business cycle synchronisation, as it would
mitigate the negative impact of sectoral
specialisation on the harmonisation of business
cycles across EU countries.
Prominent explanations of sectoral co-
movement stress either the sectoral linkages
through a web of input-output relations or
aggregate demand spillovers and trade
externalities that underline the importance of
sectoral shocks for disposable aggregate
income.18 In addition, frictions on capital,
product and labour markets may also contribute
to sectoral co-movement. For instance, when
firms are paying efficiency wages, a sectoral
shock is likely to have an impact upon the
optimal wage-employment mix even in those
sectors that are not directly affected by the
shock. Similarly, when sectoral shocks affect
the value of both tangible and intangible assets,
a re-allocation process may be set off with
repercussions for the aggregate economy.19
16 L. J. Christiano and T. J. Fitzgerald (1998), “The Business Cycle:
It’s Still a Puzzle”, Economic Perspectives, Federal Reserve
Bank of Chicago, Fourth Quarter.
17 R. E. Lucas Jr (1981), “Understanding Business Cycles”, in
Studies in Business-Cycle Theory, R. E. Lucas Jr (ed.),
Cambridge, MA.
18 J. B. Long and C. I. Plosser (1983), “Real Business Cycles”, The
Journal of Political Economy, 91/1; K. M. Murphy, A. Shleifer
and R. W. Vishny (1989) “Increasing Returns, Durables, and
Economic Fluctuations”, NBER Working Paper, 3014.
19 S. J. Davis, J. C. Haltiwanger and S. Schuh (1996), “Job Creation
and Destruction”, Cambridge, MA., pp. 106-108.
ECB
Occasional Paper No. 19
July 2004