Germany and the European Business Cycle - An Analysis of Causal Relations in an International Real Business Cycle Model

This paper studies the role of the German economy for the existence of the so called European business cycle, a term referring to the regularly observed synchronization of the national business cycles in Europe. Using a three-country general equilibrium model, we are able to simulate impulse response functions mimicking the important features observed in the data. Focusing on the importance of shocks affecting the German GDP we show that trade-related transmission from Germany to the other European economies is only of minor importance for the synchronization of national business cycles. On the contrary, our findings suggest that the influence of common shocks and of technology spillovers accounts for most of the parallels in economic performance.European business cycle; Transmission; Open economy macroeconomics; Real business cycles

Germany and the European business cycle: An analysis of causal relations in an international real business cycle model

This paper studies the role of the German economy for the existence of the so called European business cycle, a term referring to the regularly observed synchronization of the national business cycles in Europe. Using a three-country general equilibrium model, we are able to simulate impulse response functions mimicking the important features observed in the data. Focusing on the importance of shocks affecting the German GDP we show that trade-related transmission from Germany to the other European economies is only of minor importance for the synchronization of national business cycles. On the contrary, our findings suggest that the influence of common shocks and of technology spillovers accounts for most of the parallels in economic performance

Leading indicators in a globalised world

Using OECD composite leading indicators (CLI), we assess empirically whether the ability of the country- specific CLIs to predict economic activity has diminished in recent years, e.g. due to rapid advances in globalisation. Overall, we find evidence that the CLI encompasses useful information for forecasting industrial production, particularly over horizons of four to eight months ahead. The evidence is particularly strong when taking cointegration relationships into account. At the same time, we find indications that the forecast accuracy has declined over time for several countries. Augmenting the country-specific CLI with a leading indicator of the external environment and employing forecast combination techniques improves the forecast performance for several economies. Over time, the increasing importance of international dependencies is documented by relative performance gains of the extended model for selected countries. JEL Classification: C53, E32, E37, F47business cycle, forecast comparison, Globalisation, Leading Indicator, Structural change