Specialization
Versus Diversification: The Microeconomics of Regional Development and the
Spatial Propagation of Macroeconomic Shocks in Europe
Research
Training Network
Summary
The policy environment in Europe is undergoing profound changes as result of EMU and the Single Market. These developments are likely to bring about significant changes in the geographical pattern of productive activity. Understanding – and modelling – these changes is crucial for predicting how monetary and fiscal policies will propagate through the regions and nations of the European Union. Recent literature which has analysed this issue has been based on historical data and so is of limited relevance. If the location of economic activity changes as a result of EMU and the Single Market so will the synchronization of regional and national business cycles and hence the propagation mechanisms for European macroeconomic policy. In order to understand the new propagation mechanisms, we need to model the spatial pattern of European economic activity at a deeper structural level. This network's research and training programmes will address this challenging task. The network brings together researchers who have been key contributors in the fields of location economics, economic geography, economic integration and business cycle research and the statistical analysis of large dynamic time series and cross section data sets.
The outcome of these processes depends, of course on the interaction of micro- and macroeconomics and this project is investigating the nature of these feedbacks. First, we need to understand how regional specialization is likely to evolve. The network is therefore studying the determinants of agglomeration of economic activity, by examining empirically the importance of different types of externalities and the role of risk sharing. The findings will be used to evaluate competing models of economic geography. Second, the network is evaluating the implications of these 'structural' findings for the synchronization of regional cycles and, therefore, on the potential impact of European macroeconomic policy. Finally the network is evaluating the regional impact of the monetary policy on regional output and inflation. Monetary policy is assumed to target aggregate (European) inflation and output, but the geographical and temporal pattern of its impact depends on the heterogeneity of regional productive structures. The network is investigating the effect of aggregate inflation targeting on output and inflation in different European nations under a regional diversification scenario or under a regional specialization scenario.
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Summary