Does Foreign Direct Investment Synchronise Business Cycles? Results from a Panel Approach

38 Pages Posted: 21 May 2015

See all articles by Claudia Fries

Claudia Fries

Centre for European Economic Research (ZEW)

Marcus Kappler

Center for European Economic Research (ZEW)

Date Written: April 2015

Abstract

This study readdresses the determinants of business cycle synchronisation. We test, on the one hand, whether FDI promoting policies may have consequences for the business cycle comovement between countries, and on the other hand, whether more plausible identification strategies change previous results. Our results suggest that linkages through foreign direct investment contribute in most cases positively to the synchronisation between country pairs. In contrast, the beneficial effects of trade integration for the similarity of business cycles are less robust and thus less important for the transmission of idiosyncratic shocks between countries than previously thought. Finally, we find that larger differences in the sector structure between two economies result in a bigger gap between their business cycles.

Keywords: Business Cycle Synchronisation, FDI, Trade, Sectoral Differences, Panel

JEL Classification: F21, F41, F44, F49

Suggested Citation

Fries, Claudia and Kappler, Marcus, Does Foreign Direct Investment Synchronise Business Cycles? Results from a Panel Approach (April 2015). ZEW - Centre for European Economic Research Discussion Paper No. 15-031, Available at SSRN: https://ssrn.com/abstract=2608126 or http://dx.doi.org/10.2139/ssrn.2608126

Claudia Fries (Contact Author)

Centre for European Economic Research (ZEW) ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Marcus Kappler

Center for European Economic Research (ZEW) ( email )

P.O. Box 10 34 43
L 7,1 D-68161 Mannheim
Germany
+49 621 1235 157 (Phone)
+49 621 1235 223 (Fax)

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