Convergence of candidate countries to European Union : an analysis on industrial production using dynamic factor model

The aim of the paper is to compare output fluctuations in Candidate Countries and Member States of the European Union (EU) in the last decade. We assume a dynamic factor model with three additive unobserved components: the output growth for the three main industrial groupings (mining, manufacturing and electricity) is modeled as being composed by a European common component, a sectorial component and an idiosyncratic component. Such approach relies on the empirical work of Forni and Reichlin (2001). A first result of the analysis is the variance decomposition for each country; the spectral shape for the three components is also shown for some countries. Secondly, comovements of candidate countries and member states are measured at different frequencies through the cohesion measure. Finally, the phase shift for each candidate country is computed with respect to the weighted average of the estimated European components of the MS, so as to classify them into leading, coincident and lagging with respect to the EU business cycle.