| Title: |
Does Foreign Direct Investment Synchronise Business Cycles? Results from a Panel Approach |
| Author(s): |
Claudia Busl and Marcus Kappler |
| Year: |
2013 |
| Month: |
July |
| Number: |
23 |
| Pages: |
38 |
| File URL: |
fileadmin/documents/pdf/Workingpapers/WWWforEurope_WPS_no023_MS76.pdf |
| Keywords: |
Business cycle synchronization, FDI, trade, sectoral differences |
| JEL-Codes: |
F21, F41, F44, F49 |
| Abstract: |
A considerable degree of business cycle synchronization is key to a successful operating currency union. The European Monetary Union as well as many other countries strives to attract foreign direct investment (FDI) because of its reputation as being highly bene cial for the host economy. But stronger FDI linkages may also have a signi cant impact on business cycles and co-movement of these cycles between countries and therefore create a potential conflict between policies that promote FDI and the conduct of the common monetary policy. In this paper we empirically analyze the FDI channel in more detail revisiting the main determinants of synchronization. Previous studies were mainly interested in the long-run
impact employing cross-sectional variation for identi cation. Their typical identification strategy, however, neglects the strongly time variant nature in the process
of globalization in general and of FDI in specific. We extend the literature on the
determinants of business cycle synchronization by estimating the impact of the determinants with true panel data and a suitable panel estimator. Results indicate
that the trade channel is not as important as cross-section models suggest but that
FDI may have the potential to increase co-movement of business cycles. |
