Assessing Aggregate Comovements in France, Germany and Italy Using a Non Stationary Factor Model of the Euro Area

The objective of the paper is to investigate to what extent business cycles co-move in Germany, France and Italy. We use a large-scale database of nonstationary series for the euro area in order to assess the effect of common versus idiosyncratic shocks, as well as transitory versus permanent shocks, across countries over the 1980:Q1 to 2003:Q4 period. We apply the methodology proposed by Bai (2004) and Bai and Ng (2004) to construct a coincident indicator of the euro area business cycle to which national developments appear to be increasingly correlated at business cycle frequencies, while more significant differences appear at lower frequencies which measures potential growth. The indicator is also shown to be related to extra euro area economic developments.