Modeling European regional output dynamics using a dynamic
multi-level factor model
Completed research studies
Supported by: Anniversary Fund of the Oesterreichische Nationalbank
Study by: Austrian Institute of Economic Research
Closed: 2018
In this project we aim to develop a flexible dynamic factor model for European regions. Taking a regional stance allows us
to gain deep insights on the relationship between individual regions and phenomena like country-specific or global business
cycle fluctuations. Our proposed modelling approach allows answering a rich set of possible research questions. For instance,
it could provide new insights on how business cycle shocks propagate through Europe. In addition, we aim to provide new evidence
on the degree of business cycle synchronisation over time, employing a time-varying parameter framework. Finally, to assess
how well our model fits the data we also plan to perform a forecasting exercise where we predict regional output growth in
Europe.
Research group:Regional Economics and Spatial Analysis
Supported by: Anniversary Fund of the Oesterreichische Nationalbank
Online since: 13.03.2018 0:00
We develop a multivariate dynamic factor model that exploits euro area country-specific information on output and inflation
for estimating an area-wide measure of the output gap. In the proposed multi-country framework we moreover allow for flexible
stochastic volatility specifications for both the error variances and the innovations to the latent quantities in order to
deal with potential changes in the commonalities of business cycle movements. By tracing the relative importance of the common
euro area output gap component as a means to explaining movements in both output and inflation over time, the paper provides
valuable insights in the evolution of the degree of synchronicity of the country-specific business cycles. In an out-of-sample
forecasting exercise, the paper shows that the proposed approach performs well as compared to other well-known benchmark specifications.