Business Cycle Spillovers in the EU15: What is the Message Transmitted by the Periphery?

We examine business cycle spillovers in the EU15 countries by employing the spillover index approach of Diebold and Yilmaz (2009, 2012), over the period 1977-2012. The propagation mechanisms of business cycle shocks among EU15 is becoming a major interest due to unprecedented recent economic turbulence. The results of our analysis reveal the following empirical regularities. (i) The total spillover index suggests that 54.57% of the forecast error variance in all EU15 countries' business cycles can be attributed to spillovers. (ii) The index is very responsive to extreme economic events. (iii) There is an intertemporal alternation in the direction of spillovers between the Eurozone core and the Eurozone periphery. (iv) In terms of country specific results, we find that Spain is the dominant transmitter of business cycle shocks among the EU15 countries. (v) Finally, the widening of the European debt crisis can be explained by business cycle shocks in the whole Eurozone periphery. Thus, appropriate policy measures aiming to steer peripheral economies towards growth, away from turbulence and close to recovery, should be formulated.