How Regional Business Cycles Diffuse through Space and Time: Evidence from Spatial Markov Model of Polish NUTS-3 Regions

In a national economy, are individual subnational regions business cycle takers or setters? We address this important regional policy question by investigating regional business cycles at NUTS-3 granularity in Poland (N = 73), using two metrics in parallel: GDP dynamics and unemployment. To extract the business cycle, we use a spatial Markov switching model that features both idiosyncratic business cycle fluctuations across regions (as a 2-state chain), as well as spatial interactions with other regions (as spatial autoregression). The posterior distribution of the parameters is simulated with a Metropolis-withinGibbs procedure. We find a clear division into business cycle setters and takers, the latter being largely (but not only) non-metropolitan regions.