Business cycle synchronization within the Euro area: disentangling the effects of FDI

Lubica Stiblarova

Applied Economics Letters, 2023, vol. 30, issue 5, 640-644

Abstract: In this paper, we contribute to the business cycle synchronization literature by investigating a disaggregated level of foreign direct investment (FDI) that has been systematically overlooked by previous empirical studies. We disentangle FDI into two layers – extensive and intensive FDI margins – and examine their effects on the synchronization of the European Union member states with the euro area (EA) in the period 2000–2019. Our analysis, performed using the simultaneous equations methodology, confirms the over-aggregation bias, as more intense existing FDI (the intensive FDI margin) boosts synchronization, whereas new FDI (the extensive FDI margin) seems to compete with the creation of an optimum currency area within the EA. Furthermore, our results suggest that new investment promotes specialization, whereas more intense FDI reduces it, because the deepening of already existing FDI occurs in countries with similar business cycles and industrial structures.

Date: 2023
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DOI: 10.1080/13504851.2021.2008297

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