Abstract
Three small Baltic economies of Estonia, Latvia and Lithuania have undergone extreme economical system change from the planned economy to the market one. The institutional infrastructure have been reorganized and all three countries joined the EU and Euro area. We aim to answer which channels of economic integration are of the largest importance for the small open European economies. We showed that all three countries could be treated as one region due to development, institutional and economic similarities. Secondly, we explore whether the trade or common currency is the main channel for the business cycle synchronization across the region of three small Baltic economies. The business cycle synchronization and trade intensity (TI) between the Baltic States and their main trading partners before and after joining the EU have been investigated as an example of an ex-post case for the small economies. We have observed a large increase in TI with the trading partners from EMU and EU countries, irrespective of the TI calculation method. The analysis of business cycle synchronization of the Baltic States with their main trading partners is captured by the correlations of the cyclical component of GDP series, using the quarterly real and de-trended GDP growth data from 1995 Q1 to 2019 Q4. The panel model has indicated an important empirical feature that the common currency strongly and significantly impacted the business cycle synchronization whilst the bilateral trade intensity between the Baltic States and their main trading partners have a significant negative effect on the business cycle synchronization when controlling for time effects. The Granger causality test confirmed that the most robust impulses to the Baltic States are coming from EU trading partners.
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Source: Authors’ own calculation
Source: Authors’ own calculation
Source: Authors’ own calculation
Source: Authors’ own calculation. B Bilateral trade intensity (when trade is normalized by the total GDP) between the Baltic States and the main trading partners before (2004 Q2) and after joining the EU*. *The total period was split into two subperiods: before (2004 Q2) and after joining the EU. The sample was divided into a few graphs due to different trade intensity scales for better visualization. Source: Authors’ own calculation
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Notes
Research project | Euro4Europe (vu.lt)
For quarterly data we applied “Burns-Mitchell” settings of 6 quarters for the minperiod(#) and 32 quarters for the maxperiod(#), i.e. 1.5–8 years respectively, and the smartorder(#) = 12.
The results are robust as BC extracted by all three filtering methods are similar.
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Acknowledgements
We have benefited from the comments and discussions shared with the “Euro4Europe” team members Mariarosaria Comunale, Jarko Fidrmuc, Jesus Crespo Cuaresma, Peter Huber, Svatopluk Kapounek, Dmitrij Celov, Povilas Lastauskas. The research has received funding from the European Social Fund (project No 09.3.3-LMT-K-712-01-123) under a grant agreement with the Research Council of Lithuania (LMTLT).
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Rubčinskaitė, R., Urbšienė, L. What matters for the economic synchronization of the Baltic States. Empirica 51, 645–678 (2024). https://doi.org/10.1007/s10663-024-09615-1
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DOI: https://doi.org/10.1007/s10663-024-09615-1