Business Cycle Synchronization of a Small Open EU-Candidate Country’s Economy with the EU Economy

Abstract

The objectives of this paper are to empirically identify business cycles in a small open EU-candidate country such as the Republic of Macedonia and to assess the degree of synchronization of the country’s business cycle with the cycle of the EU economy. Towards the first objective, we apply linear and nonlinear methods for delineating the production gap cycle in the Macedonian economy. As for the second objective, we apply autoregressive methods to assess the size and speed of cyclical adjustment of the Macedonian economy to output shocks to the Euro-zone economy. The results of our analysis suggest a high degree of synchronization of the Macedonian business cycles with the cycles of the EU economy. Also, the shocks in economic activity in the Euro-zone economy are transmitted almost instantaneously, and with a large magnitude, to the Macedonian economy. Finally, the impact of the Euro-zone output contraction is less pronounced than the impact of the Euro-zone output expansion, suggesting an impact of the country’s autonomous countercyclical economic policies