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Sharing is caring: Spillovers and synchronization of business cycles in the European Union

Vladimir Arčabić () and Tihana Škrinjarić ()

Economic Modelling, 2021, vol. 96, issue C, 25-39

Abstract: This paper analyzes business cycle spillovers and synchronization within groups of old and new European Union countries. Firstly, we show that business cycle spillovers are very important, explaining between 50 and 90 percent of the variation in output. Spillovers were especially pronounced during the 2007–2016 period of the Great Recession, which limited national stabilization policies. Because new member states are highly integrated they are very sensitive to spillovers from old member states. Secondly, shock spillovers are symmetric, and business cycles became more synchronized after the Great Recession. This finding is important for Eurozone monetary policy as similar spillovers are beneficial for the common monetary policy. Therefore, sharing is caring, as business cycle spillovers are shown to be a factor leading to more integrated and synchronized Europe. However, large spillovers limit national stabilization policies, increasing the vulnerability of smaller countries. A greater degree of international policy coordination may be required.

Keywords: Business cycle; Spillover index; Synchronization; Eurozone; Vector autoregression (search for similar items in EconPapers)
JEL-codes: C32 C54 E32 F44 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:96:y:2021:i:c:p:25-39

DOI: 10.1016/j.econmod.2020.12.023

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