Endogenous Optimum Currency Areas and the Blend of Sectors – On the Determinants of Business Cycle Correlation across European Regions

This paper examines the degree of correlation of EU regional employment cycles and attempts to show whether these cycles reflect changing patterns of specialisation. By focusing on the regional level and by employing three different indicators of similarity of sectoral structure, it improves on existing studies. A dynamic panel data model is estimated for region pairs by within groups, i.e., by a standard fixed effects estimator. Special attention is paid to capture the rich dynamics which is typical of employment data. The key finding is that employment growth is more synchronised when regions look alike in their sectoral structure. The empirical results again highlight the problem of a common monetary policy for uncommon regions within the euro zone.