Structural Similarity as a Determinant of Business Cycle Synchronization in the European Union: A Robust Analysis

Abstract

This paper presents evidence of the significant impact of structural similarities on business cycle synchronization. Using Sala-i-Martin’s methodology (1997a; 1997b), proven correlation coefficients of structural shares are offered as robust determinants of business cycle synchronization. The results are not only robust across different levels of disaggregation, but also for value added and employment shares. The results are not robust across measures. The linear measure has proven to be a bad proxy for structural similarities as a determinant of business cycle synchronization. The degree of convergence is also a robust determinant of business cycle synchronization, with the negative point estimate. This might be explained by Imbs and Wacziarg’s U-Shape specialization curve. Convergence might lead to higher business cycle synchronization through the channel of specialization. This notion is confirmed by the results of simultaneous equations estimation. Finally, evidence is found that higher structural similarities can better foster a similar response to external exogenous economic shocks.