Macroeconomic performance of European Union's small open economies during the COVID-19 pandemic

Abstract This paper explains the business cycle characteristics in the small open European Union Countries during the COVID-19 pandemic. The panel cyclical components of GDP and its components, labour, and average product of labour were computed. The study adopts a real business cycle model with importable, exportable, and tradeable products to explain the cyclical characteristics of small and big EU countries. According to the results, the business cycle characteristics of the big EU countries during the pandemic correspond to the findings from the papers worldwide. The primary shock was a decrease in the labour supply. An increase in the adjustment capital costs explains the unusual consumption volatility. Results related to the small EU countries differ from those of the big countries and those obtained in other studies. The primary source of macroeconomic changes during the pandemic was changes in the terms of trade. Changes in the labour supply were also significant. The higher capital adjustment costs explain the consumption volatility, and the higher debt service costs explain the investment volatility.