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Are Microstates Necessarily Led by Their Bigger Neighbors’ Business Cycle? The Case of Liechtenstein and Switzerland

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  • Andreas Brunhart

    () (Liechtenstein Institute)

Abstract

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.

Suggested Citation

  • Andreas Brunhart, 2017. "Are Microstates Necessarily Led by Their Bigger Neighbors’ Business Cycle? The Case of Liechtenstein and Switzerland," Journal of Business Cycle Research, Springer;Centre for International Research on Economic Tendency Surveys (CIRET), vol. 13(1), pages 29-52, May.
  • Handle: RePEc:spr:jbuscr:v:13:y:2017:i:1:d:10.1007_s41549-017-0013-x
    DOI: 10.1007/s41549-017-0013-x
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    Keywords

    Business cycles; Leading indicators; Microstates; Liechtenstein; Switzerland; VAR models; Granger causality;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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