On the transmission of economic fluctuations from the USA to EU-15 (1960–2011)

Abstract

Business cycle synchronization is a useful framework for analyzing the transmission of economic fluctuations. This work checks for synchronization between the USA and the EU-15 economies tracing the timing pattern and the magnitude of the synchronization. It identifies and estimates the link between GDP fluctuations in the USA and the EU-15. In particular, it shows that there is a strong relationship between GDP fluctuations in the USA and the EU-15 in the 1960–2011 time span, which fully captures the recent global recession, as well as other crises of the past five decades. Also, the Euro currency was introduced in 1999 so the period is broken down into two sub-periods (1960–1999 and 2000–2011) in order to examine its potential impact. Finally, the trends in the transmission processes and causalities are examined in accordance with earlier studies. The paper's main finding, which is of great interest, is that the economic fluctuations move from the US to the EU. In other words, output fluctuations in the US economy cause output fluctuations in the EU-15 economy. Also, regarding the timing pattern, the changes in the US GDP cycle are transmitted very rapidly to the EU-15 countries. Lastly, we find evidence of increased transmission of the economic fluctuations from the US to the EU-15 after the introduction of the Euro currency.