Abstract
The literature on international business cycles has employed dynamic factor models (DFMs) to disentangle global from group-specific and national factors in countries’ macroeconomic aggregates. Therefore, the countries have simply been classified ex ante as belonging to the same region or the same level of development. This paper estimates a DFM for a sample of 106 countries and three variables (output, consumption, investment) over the period 1960–2014, in which the countries are classified according to the outcome of a cluster analysis. By comparing the results with those obtained by the previous grouping approaches, we show substantial deviations in the importance of global and group-specific factors. Remarkably, when the groups are defined properly, the “global business cycle” accounts for only a very small fraction of macroeconomic fluctuations, most evidently in the industrialized world. The group-specific factors, on the other hand, play a much greater role for national business cycles than previously thought—also in the pre-globalization period.
Highlights
The globalization of trade and financial linkages over the past decades coincided with many regional and group-specific integration processes affecting countries’ economic developments to varying degrees
As is common in the literature on the international business cycle, we impose a hierarchical structure, that is, all countries and variables load on the global factor but each country only belongs to one group
The literature on international business cycles has frequently employed dynamic factor models (DFMs) presuming the existence of group-specific factors among countries of the same region or at the same level of development
Summary
The globalization of trade and financial linkages over the past decades coincided with many regional and group-specific integration processes affecting countries’ economic developments to varying degrees. As the severity and recovery time of globally experienced shocks have differed more significantly across such country groups since the financial crisis of 2008/2009, one might expect a shift in the relative importance of international factors for domestic business cycles. To quantify each country’s vulnerability to foreign developments on different levels, the empirical literature has decomposed national macroeconomic fluctuations into global, group-specific, and country-specific factors using large-scale dynamic factor models (DFMs). An important aspect of this empirical literature is that there is still a controversy regarding the relevance of a global factor governing local business cycles. Commons Attribution licence (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted re-use, Downloaded from https://www.cambridge.org/core. IP address: 52.91.235.158, on 02 Nov 2021 at 12:46:28, of use, available daitshtrtitbpust:i/o/wn,wawnd.carempbrordidugceti.oonrgi/ncoarney/tmeremdisu.mht,tpprso:/v/iddoeid.otrhge/1o0ri.1g0in1a7l/Sw1o3r6k5i1s0p0r5o2p0e0rl0y0c0i4t8ed
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
