THE TRANSMISSION OF BUSINESS CYCLES FROM THE EU TO THE CROATIAN ECONOMY

The aim of the paper is to analyze the business cycles transmission from the EU to Croatian economy and to determine whether there was a change in the intensity of transmission of business cycles in the recent period. For this purpose, the transmission of cyclical movements is analyzed in five EU countries (Austria, France, Germany, Italy and the UK) and EU-15 as an aggregate area, for the period from 1997:Q1 to 2010:Q4 and the sub period from 2000:Q1 to 2010:Q4. The analysis is based on the two variable VAR model (foreign and domestic real GDP). Results indicate that Croatia has been extremely sensitive to economic shocks from abroad. Also, the analysis shows that the intensity of transmission of business cycles has further increased in the recent period. Variance decomposition shows that in the period 1997-2010 the foreign component explained between 35 and 48 per cent of domestic business cycles variation, while in the period 2000-2010 it explained between 68 and 82 per cent of the variation. Furthermore, the impulse response function shows that the transmission of shocks from abroad has been longer and more persistent than the transmission of domestic shocks. Moreover, in the period 2000-2010 external shocks were three to five times stronger than domestic shocks. A possible reason for an increased transmission of business cycles could be the larger weight of the global fi nancial crisis in the sub period 2000–2010.