The fall and rise of business cycle co-movements in Imperial Austria’s regions

This paper investigates regional business cycle co-movements in Austria–Hungary from 1867 to 1913. Economic theory suggests that rising market integration induces sectoral specialisation, resulting in a reduction in the correlation of regional GDP cycles (Krugman effect). However, the synchronisation of business cycles is expected to increase because of the growing inter-linkages among regions led by the adoption of common currency and common economic policies (Frankel and Rose effect). We show that in the case of nineteenth-century Austria–Hungary the specialisation effect, most likely amplified by the stock market crisis of 1873, prevailed during 1867–1890, while the common currency/policy effect prevailed during 1890–1913, when the gold standard was adopted in both Austria and Hungary. However, core and peripheral regions contributed differently to the correlation of business fluctuations.