Why do regional economies behave differently? A modelling approach to analyse region-specific dynamics along the business cycle

ABSTRACT

Even though the evolution of regional economic activity is substantially explained by national/common economic shocks, regional economies can still engage in significant differential or divergent behaviours with regard to the national average across business cycles. In this article, we describe a modelling approach based on factor models that estimates differences in quarterly regional GDP levels and allows for the evaluation of the variables that best explain these differentials. To provide an example of the application of this approach, two Spanish regions are used: Andalusia and Catalonia.

KEYWORDS:

• Regional economic activity
• real-time dataset
• difference indicators
• dynamic factor model
• GDP differential

JEL CLASSIFICATION:

• C32
• E32
• R11

Disclosure statement

The authors reported no potential conflict of interest.

Notes

¹ All the datasets are available upon request.

² The comparison with a univariate benchmark confirms that the introduction of exogenous information is appropriate to explain the GDP differential, as the error term is lower than that in the benchmark case. However, we cannot draw conclusions on the overall estimation accuracy. For this purpose, it would be useful to have more evidence, but the task is beyond the scope of this article.