Domestic versus International Determinants of European Business Cycles: a GVAR Approach

We investigate the sources of macroeconomic (output and inflation) variability in selected European countries within and outside the European Monetary Union: Germany, Italy, Austria, the UK, and Poland. We estimate a global vector autoregressive model with quarterly data for fifteen countries and regions covering more than 90 per cent of the World GDP. We find that domestic factors explain most of the macroeconomic variability over the short horizon, i.e. from zero to four quarters, but become progressively dominated by international ones at larger horizons. Regional factors appear to be particularly important. Focusing on the European Monetary Union, we detect no significant differences between countries current members and non-members in the sources of output variability. As for inflation, on the contrary, regional factors are more influential than those of the rest of the world for the EMU member countries, differently from non-members.