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Previous articleNext article FreeCommentKenneth D. WestKenneth D. WestUniversity of Wisconsin and NBER Search for more articles by this author PDFPDF PLUSFull Text Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinked InRedditEmailQR Code SectionsMoreLet me begin with a summary of this interesting paper before making some comments. Aruoba et al. use a two-step procedure to fit a factor model to aggregate data from the Group of 7 countries. In the first step, they take each of the seven countries in isolation and fit a one-factor model to growth rates or ratios of six series: quarterly GDP and disposable income, along with monthly employment, industrial production, retail sales, and initial claims for unemployment insurance. In the second step, they fit a one-factor model to the seven country factors constructed in the first phase.The country factors constructed in the first step have some reasonable and appealing properties. Almost all series load positively and significantly on the factor, with the exception of initial claims for unemployment insurance (top of table 2); the U.S. factor tends to fall sharply during NBER recessions (fig. 14); a fall in volatility (also known as the Great Moderation) is clear in most of the country factors (figs. 8–14). Things we learn from the country factors include the following: GDP generally has the largest effect on the country factor (panels A and B of table 3); factors generally are highly serially correlated (middle of table 2—somewhat surprising since most of the six observable series are entered in growth rates); factors are positively correlated across countries, with a correlation that changes over time (table 5); because of the ongoing crisis, this correlation is highest in the most recent decade (table 5).The global factor constructed in the second step also has some reasonable and appealing properties. All seven country factors load significantly on the global factor (table 6); the global factor falls sharply during worldwide recessions such as the 1970s and 2000s (fig. 16). Something we learn from the global factor is that some recessions occur when the global factor declines, some when thecountry-specific idiosyncratic component declines (discussion in Sec. V.B.2).Let me now turn to my comments. This paper is on an interesting topic (statistical modeling of global business cycles), uses appropriate and sophisticated technical tools, and has a lot of potential. Most of my comments will come in the form of questions or suggestions that I hope will help the authors achieve that potential. I first begin with technical issues and then go on to larger questions.Technical issues:1. Is the use of a single factor at each of the two steps advisable let alone optimal? At the country level, is it possible that we need two country factors, perhaps a real and a nominal factor, for either statistical fit or economic interpretation? Similarly, at the global level, is it possible that we need two global factors, perhaps an oil and an “everything else” factor?2. In the first step, is it innocuous to enter data in growth rates? Within a country, the implicit assumption is that there is no cointegration across variables entered in growth rates.3. Why doesn’t the model allow for time variation in parameters? Along with a vast literature, this paper finds that volatility has declined (the Great Moderation). The model, however, assumes covariance stationarity, implying constant second moments. Thus the finding of declining volatility would seem to be a specification test that indicates that the model is misspecified.Larger issues: if I were to be asked to think about global versus country-specific transmission of economic fluctuations, questions I might ask include the following.4. Does one country or set of countries systematically lead the others? For example, when the United States sneezes, does the rest of the world catch a cold?5. Is transmission of shocks sharper or faster for countries that are tightly linked (e.g., Canada and the United States) than for those whose links are weak?6. And what measure of “links” is appropriate? Trade? Policy coordination? Extent of one’s dependence on imported oil?7. What economic forces underlie the common element in cross-country fluctuations? Technology? Oil? Coordinated policy? Capital flows? Exchange rate mechanism?This paper does not attempt to answer these questions. But given the discussion in Section II of the paper, it is clear that the authors are aware of such questions. I hope that they will provide some answers in their future research.NotesI thank the National Science Foundation for financial support. Previous articleNext article DetailsFiguresReferencesCited by Volume 7, Number 12011 Article DOIhttps://doi.org/10.1086/658321 Views: 89 © 2011 by the National Bureau of Economic Research. All rights reserved.PDF download Crossref reports no articles citing this article.