Domestic and international influences on business cycle regimes in Europe

This paper examines the roles of domestic and international variables in predicting classical business cycle regimes in Germany, France, Italy and UK over the period 1970 to 2001. Regimes are examined as binary variables representing expansions versus recessions. A range of domestic real and financial variables are initially used as leading indicators, with these variables predicting regimes in Germany reasonably well during the in-sample period 1996, followed (in order) by UK, Italy and France. Consideration of foreign variables leads to important roles for the composite leading indicators and interest rates of US and Germany. The relative importance of these variables differs across countries, but overall they underline the role of international influences in the business cycles of these European countries. Post-sample forecasts are examined, with the international model for Germany correctly indicating recession during 2001.