Business Cycles Synchronicity and Income Levels: Has Globalization Brought Us Closer than Ever?

Abstract

Research on business cycle linkages show a tendency to model countries of relatively the same income level jointly. However, the issue of whether countries with the same income level move along the same business cycles has not been investigated formally. The recent push by regional/economic bloc of countries toward the adoption of one currency tends to suggest an interdependence of macroeconomic activities but not necessarily a common cycle. In this paper, we use real income per capita from the United Nations Statistical Database based on income classification by the World Bank and the nonparametric measure of cycle synchronicity proposed by Mink, Jacobs, and de Haan (2007) to develop a two-step approach to investigate the linkage between business cycles and income levels. First, we examine the business cycles of each category of countries to determine whether each group of countries follows its own dynamics and is therefore subjected to the same business cycle and these cycles are independent of each other across groups. Second, we use panel data analysis in search for an explanation of the synchronicity of the cycles observed. The overall results indicate that high income per capita countries (HICs) tend to be guided by stronger similarity in business cycles than countries in the middle (MICs) and low income (LICs) groups. The synchronicity ratios are on average 51, 50, 54, 73, and 100 percent for the LICs, low middle income countries (LMCs), upper middle income countries (UMCs), HICs - OECD, and HICs - non-OECD countries, respectively. We also determined that across groups, the wavelength was common in most of the countries suggesting the existence of a common world cycle. The results from the robust fixed effects estimation show that real oil price is consistently significant in explaining the synchronicity of output gaps.Research on business cycle linkages shows a tendency to model countries of relatively the same income levels jointly. However, the issue of whether these countries move along the same business cycles has not been formally investigated in the literature. In this paper, we take this approach and investigate whether each group of countries follows its own dynamics and is therefore subjected to the same business cycle and whether these cycles are independent of each other across income groups. Results indicate that high income per capita countries (HICs) tend to be guided by stronger similarity in business cycles than countries in the middle (MICs) and low income (LICs) groups. In search for an explanation of the business cycles synchronicity observed, panel data analysis was explored. The results from the robust fixed effects estimation show neither trade openness nor shocks to consumption underlie international business cycle synchronization, but rather shocks to oil prices.