A Tale of Two Cycles: Co-Fluctuations Between UK Regions and the Euro Zone

We examine the patterns and determinants of business cycle correlations among 11 UK regions and six euro-zone countries over the 1966-97 period, using the generalized method of moments to allow for sampling error in comparing estimated correlations. The British business cycle is found to be persistently out of phase with that of the main euro-zone economies, and the trend is towards lower correlations. We detect only minor cyclical heterogeneity among UK regions. Differences in sectoral specialization drive some of the asymmetry in GDP fluctuations, but they do not appear significant in explaining the observed reduction in UK-EU business cycle correlations over time.