Financial Linkages and Sectoral Business Cycle Synchronization: Evidence from Europe

We analyze whether financial integration leads to converging or diverging business cycles using a dynamic spatial model. Our model allows for contemporaneous spillovers of shocks GDP growth between countries that are financially integrated and delivers scalar measure the spillover intensity at each point in time. For network ten European from 1996 2017, we find effects positive on average much larger during periods stress, pointing towards stronger cycle synchronization. Dismantling into value added major industries, observe intensities vary significantly. The findings robust variety alternative specifications.