Brunhart, Andreas (2017): Are Microstates Necessarily Led by Their Bigger Neighbors’ Business Cycle? The Case of Liechtenstein and Switzerland. In: Journal of Business Cycle Research, Volume 13, Issue 1, pp. 29–52.
This paper investigates Liechtenstein’s business cycle compared to its
neighboring countries (Switzerland, Austria) and other countries with
strong economic relations with Liechtenstein (Germany, Italy, France,
USA). In contrast to the widespread notion of small countries
“importing” the business cycle from bigger nations, it is shown that the
real GDP of the microstate Liechtenstein is a leading indicator for the
economy of its bigger neighbor Switzerland, regarding the growth rates
as well as the output gap. This finding is based on cross correlation
analyses and single- and multi-equation Granger causality tests,
applying annual data from 1972 until 2014 or 2015. The significant GDP
lead of one year is robust across all the various time frames and model
specifications and seems to be driven by the goods exports. Also,
Liechtenstein seems to react earlier to US business cycle fluctuations.
This finding is not only interesting in the context of Liechtenstein and
Switzerland but also encourages further research as it indicates the
possibility that very small states are not only more exposed to foreign
shocks, react more sensitively to international economic fluctuations,
and are more volatile than their big “patron” nations—all stylized facts
from small state economics literature—, but that their business cycles
could be affected earlier.
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