Business cycle synchronization between the EU and Western Balkan candidate economies: A Wavelet Analysis

TL;DR

This paper uses wavelet analysis and Bayesian regression to examine how business cycle synchronization between the EU and Western Balkan countries varies across different time horizons and is influenced by trade and institutional factors.

Contribution

It introduces a wavelet-based, frequency-specific approach to analyze business cycle synchronization, revealing horizon-dependent dynamics and the impact of trade and institutional integration.

Findings

EU-WB dyads are less synchronized than EU-EU in the short run.

Trade deepening enhances short-run synchronization within pairs.

Long-term synchronization is less affected by EU/EMU status and more by sectoral convergence.

Abstract

Business cycle synchronization between EU and Western Balkan candidate economies is usually modeled with aggregate time-domain correlations that mix short-run and long-run dynamics. This paper addresses that limitation by combining wavelet-based time-frequency decomposition with Bayesian zero-inflated beta regression. Using annual dyad-year data for 2001--2021, we estimate synchronization separately at shorter (1.5--4.5 years) and longer (4.5--8.5 years) horizons and relate each horizon to its correlates. The results show that EU--WB dyads are less synchronized than EU--EU dyads in the short run, and that trade deepening over time is more positively associated with short-run synchronization in EU--WB pairs. At longer horizons, the positive association between shared EU/EMU membership and synchronization weakens or reverses when the same country pair moves into deeper institutional integration, while differences across country pairs in average EU/EMU status become negligible. Over the same horizon, trade deepening within a pair is more consistently associated with synchronization, and more persistent structural dissimilarity is associated with lower synchronization. EU--WB dyads are no longer clearly less synchronized at these frequencies, and the remaining convergence pattern is more consistent with sectoral differences narrowing over time than with trade. These findings indicate that synchronization channels are horizon-dependent and that conclusions based on single-horizon correlation measures can obscure the distinction between short-term coupling and structural convergence.