Are countries' economic vulnerability consistent with their intrinsic business behavior? : a comprehensive empirical analysis of possible influences

Abstract

Small nations, particularly small island states, have to face a wide spectrum of risks because they possess a ubiquitous combination of intrinsic geographical, demographic, and economic characteristics - this provides the potential for such countries to suffer from unexpected economic upheavals brought upon by external shocks; it is now well documented that such effects have virtually little, or no parallel in their larger counterparts. The reasons why size apparently imparts immunity from such shocks have been rigorously investigated over the last twenty years; great empirical strides have been made in the development of appropriate measures of vulnerability, together with the implications which they pose for the appropriate policy implementation, so to build adequate resilience. Business cycle research, in contrast, has enjoyed a wider audience for a much longer period of time, perhaps due to its more universal appeal. This latter is guaranteed and enhanced by the fact that the more mature economies of today, together with those still striving through the development process, are characterized by free-market economies. The competitive reign of the price mechanism in such economic environments means that the latter inevitably are subject to short-term fluctuations, or business cycles. The obsession to predict the onset of business cycles, in an attempt to mitigate the eventual socio-economic ripple effects bound to occur, has been the subject of much empirical work. The forecasting studies of cyclical changes - particularly downturns - and the determination of historical turning point chronology complement and augment each other in their conceptual and empirical treatment of business cycle research. This dissertation aims to unify, within a common empirical framework, the strands of thought concerning vulnerability, resilience, and the related indices, with that of business cycle analysis. Through the application of a limited panel data analysis, the existence, if, any of causality between these two diverse subject areas is explored.