Business cycles of Baltic countries and their main trading partners

ENThe aim of the paper is to analyse relationship between international trade and the correlation of the business cycles between Baltic countries and their main trading partners. Two univariate methods are used to extract cyclical components in the time series: exponential smoothing procedure the Hodrick – Prescott filter and unobserved components method. A simple regression model proves the hypothesis that trade intensity has led to business cycle synchronization. The main conclusion is that there exists a strong correlation between the business cycles of the Baltic countries. However, the economic cycle of Baltic countries is different from that of their main trading partners in EU. According to Optimum Currency Area theory, these results cast doubts on the usefulness of adopting the euro in the Baltic countries in the near future. On the other hand, recently the deepening of economic integration has led to make intense trade between the Baltic countries and the EU, which may eventually imply more synchronised cycles in the future. Key words: business cycles, international trade, Optimum Currency Area.