The Swiss business cycle and the lead of small neighbor Liechtenstein

This contribution investigates the business cycles of Switzerland compared to its five neighboring countries Germany, Austria, Italy, France and Liechtenstein. In contrast to the widespread notion of small countries “importing” the business cycle from bigger neighbors, it is shown that the real GDP of the very small neighboring country Liechtenstein is a leading indicator for Switzerland’s economy, regarding the growth rates as well as the output gap. This finding is based on cross correlation analyses and univariate and multivariate Granger causality tests, applying annual data from 1972 until 2013. The significant lead of one year is robust across all the various country-samples, time frames and model specifications. This conclusion indicates the possibility that small nations are not only more opposed to foreign shocks, react more sensitively to international economic fluctuations, and are more volatile than big nations – all stylized facts from small state economics literature –, but that their business cycles are also affected earlier.