The Baltic States and Europe: Common Factors of Economic Activity

Working Paper 3/2008

Abstract
This paper aims at characterising fluctuations of economic activity that are common for the Baltic States, CEE countries, euro area countries and Russia. The real standardised GDP quarterly growth is chosen as an indicator of economic development of the countries. Three methods are employed: static factor analysis, dynamic factor model and dynamic correlation. Special attention is given to the analysis of Latvian economy.
The results of the study show that the Baltic economies are similar in economic development and share a common factor. After 2000, the real standardised GDP growth in the Baltic States became more correlated with the GDP growth of the main euro area countries indicating growing synchronisation of economic development between these country groups.
The role of the main final demand components (exports, consumption and investment) in explaining common fluctuations in the real standardised GDP growth in the Baltic States is evaluated by analysing common factors for each component and dynamic correlation between components for each country.

Keywords: business cycle synchronisation, dynamic factor model, dynamic correlation

JEL codes: E32, F20, C10

Research published: The Baltic States and Europe: Common Factors of Economic Activity. Baltic Journal of Economics, 2008, No. 8 (1), pp. 75-96. Available: http://www.biceps.org/en/node/101