1 THE RELEVANCE OF SECTORAL
SPECIALISATION FOR MONETARY POLICY
1.1 INTRODUCTION AND MOTIVATION
The introduction of the Single Market in 1993
and the implementation of the single monetary
policy six years later contributed to the
increasing integration of the economies of EU
countries during the 1990s. The economic
integration process experienced by EU
countries can result in significant changes in the
location of industry and the macroeconomic
dynamics of Member States1, although
economic theory offers different predictions as
to how product and factor market integration
will affect cross-country differences in sectoral
composition.
Sectoral specialisation is broadly understood as
the degree to which suitably defined economic
sectors attract larger shares of employment or
output in one country relative to another. This
report will review sectoral specialisation in EU
countries - using the EU as a benchmark - and
the changes that have taken place in the sectoral
composition of output and employment - i.e.
sectoral re-allocation2 - from the point of view
of their likely impact on the macro-economy and
their relevance for monetary policy. In this
regard, the report complements previous work
undertaken by the European Commission and
the OECD on the issue of sectoral
specialisation.
In particular, the impact of sectoral
specialisation on both productivity increases
and business cycle developments will be
addressed. Moreover, national inflation
developments may be partly affected by sectoral
composition on account of differences in price
dynamics across sectors. Finally, sectoral
specialisation may have an impact on the
transmission mechanism through which
monetary policy changes affect inflation
dynamics. Nevertheless, these latter two points
will not be followed up in this report.
1.2 THE RELEVANCE OF SECTORAL
SPECIALISATION FOR MONETARY POLICY
Given that price dynamics differ between
sectors, national inflation developments may be
partly influenced by the sectoral specialisation
of Member States3. Moreover, similar sectors
could experience different price dynamics
across countries; this can happen if, for
instance, shocks are country-specific rather
than sector-specific or if the ability to absorb
common sectoral shocks varies across countries
as a result of differences in the detailed
economic structure of the sector concerned and
the regulatory framework affecting this sector.
Overall, the national inflation rates of EU
countries can be temporarily influenced by the
relative size of sectors with strong or weak
price dynamics or by similar sectors
experiencing different degrees of relative price
adjustments.
Sectoral specialisation may have a bearing on
the way monetary policy is conducted when it
affects the transmission mechanisms of
monetary policy. Existing studies4 suggest that
sectoral characteristics such as capital intensity,
average firm size and - to a lesser extent - the
degree of openness to foreign competition play
an important role in determining the impact of
monetary policy on sectoral output growth and
inflation. For instance, sectors with higher
capital intensity, lower average firm size and
lower degrees of openness appear to be more
affected by monetary policy changes.
Consequently, cross-country differences within
the euro area regarding the effects of monetary
1 The location of European industry has already been the subject
of several reports, for instance by the European Commission,
see K. H. Midelfart-Knarvik, H. G. Overman, S. J. Redding, and
A. J. Venables (2000), “The Location of European Industry”,
report prepared for DG ECFIN, European Commission, Brussels.
2 Throughout this report the terms “sectoral re-allocation” and
“structural adjustment” are used synonymously, referring to the
change in sectoral composition of output or employment.
3 For a recent overview of inflation differentials and its causes
across euro area countries see the MPC report on “Inflation
differentials in the euro area: potential causes and policy
implications”, ECB, September 2003.
4 See, for instance, G. Peersman and F. Smets (2002), “The
Industry Effects of Monetary Policy in the Euro Area”, ECB
Working Paper 165.
1 THE RELEVANCE
OF SECTORAL
SPECIALISATION
FOR
MONETARY POLICY
ECB
Occasional Paper No. 19
July 2004