BUSINESS CYCLE SYNCHRONIZATION CHANNELS IN THE EUROPEAN UNION

Sebastian-Florian Enea () and Silvia Palascã ()
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Sebastian-Florian Enea: Alexandru Ioan Cuza University of Iasi, Romania
Silvia Palascã: Alexandru Ioan Cuza University of Iasi, Romania

A chapter in EURINT Proceedings 2013, 2013, vol. 1, pp 564-575 from Centre for European Studies, Alexandru Ioan Cuza University

Abstract: The phenomenon of globalization has affected the business cycle synchronization in many EU countries and has increased transnational economic activities. In today’s globalized economy, foreign direct investments (FDI) and trade relations are considered to be the main vectors of globalization. Furthermore, while FDIs are perceived as transmission channels for economic shocks and have a long term effect on national economies, trade affects the short-term behavior. The aim of the present paper is to explain the business cycle synchronization in the European Union based on the relationship between the GDP, FDI and trade relationships in order to determine the best transmission channel. We analyze the impact of FDI on the business cycle phase highlighted by economic growth. Because synchronization is dictated by interconnections between countries, trade relationships are due to have a significant influence in the model. In this respect we use a hierarchical cluster analysis for the European Union. The cluster approach is effective due to similar ranking of countries which display comparable behavior. The results of the study show that, in the context of globalization, we can explain business cycle synchronization in the European Union based on the GDP through FDI for long term interactions and trade relationships for short- term associations. Regarding the future research directions, they will imply a more complex study that will include an analysis for all the 27 member states of the European Union and an increased number of variables.

Keywords: business cycle synchronization; foreign direct investments; trade relationships; cluster analysis; globalization (search for similar items in EconPapers)
Date: 2013
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