Business cycle synchronization of a small open EU-candidate country’s economy with the EU economy

Vladimir Filipovski,Jane Bogoev,Predrag Trpeski

doi:10.2298/pan160209017f

Vladimir Filipovski, Jane Bogoev + Show 1 more

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https://doi.org/10.2298/pan160209017f

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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 non-linear 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.

Highlights

Republic of Macedonia (RM) is a small, open economy, which has undergone a transition from a socialist-type to a market-based economy
When Euro-zone is in a phase of expansion, i.e. when the quarterly rate of real GDP growth of the Euro-zone is higher than 0%, i.e. 0.4%, the domestic economy will grow with a real quarterly growth rate of 1.1%, i.e. 1.3%, respectively
In terms when the Euro-zone is in a phase of recession, i.e. when the quarterly rate of real GDP growth is less than 0% or 0.4%, the domestic economy will decline by 0.3% and 0.4% on a quarterly basis

Summary

Introduction

Republic of Macedonia (RM) is a small, open economy, which has undergone a transition from a socialist-type to a market-based economy. In parallel to the transition process, the process of integration into the EU economy has been taking place, as the EU has been the main trading and investment partner of the Republic of Macedonia. In 2005, the Republic of Macedonia has become an EU-candidate country and since it has continuously been receiving positive reports by the European Commission on its efforts to integrate its economy into the EU economic institutional structure. On the economic policy front, one of the features of the Republic of Macedonia is the de facto fixed exchange rate regime for quite a long period (starting from 1995), whereby the national currency, the denar, has been pegged first to deutsche mark, and later on to the euro

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