This paper investigates the importance of a common factor and
region-specific factors in Korea’s 16 local economies’ business cycles. A
Bayesian dynamic factor model is utilized to estimate a dynamic factor common
to all macroeconomic aggregates (output, consumption, and investment) and
local economies, and 16 region-specific factors common to all local
aggregates, simultaneously. To examine the relationship between the
importance of unobserved factors and the macroeconomic structure of the local
economies, we perform a linear regression analysis. The results indicate that
overall, the common factor plays an important role in driving Korea’s local
business cycles. Especially, the common factor is the critical source of
volatility of both consumption and output. On the other hand, the common
factor plays a minor role explaining investment fluctuations. This paper also
finds that the importance of the common and region-specific factors across
Korea’s local economies, is affected by the local macroeconomic structure such
as the share of government expenditure in GRDP and manufacturing’s share of
output.