GEP Research Paper 01/02
A Tale of Two Cycles: Co-fluctuations Between UK Regions and the Euro Zone
Salvador Barrios, Marius Brülhart, Rob Elliot and Marianne Sensier
Abstract
We examine the patterns and determinants of business-cycle correlations among eleven UK regions and six euro zone countries over the 1966-1997 period, using GMM to allow for sampling error in comparing estimated correlations. The British business cycle is found to be significantly and persistently out of phase with that of the main euro zone economies. This is a nation-wide phenomenon, as we detect only minor cyclical heterogeneity among UK regions. Differences in sectoral specialisation and exchange-rate variability drive some of the asymmetry in GDP fluctuations, but they do not appear significant in explaining the observed reduction in UK-EU business-cycle correlations over time. There remains a large unexplained element in the idiosyncratic component of the UK business cycle.
Issued in May 2001.
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