International Business Cycle Spillovers

Abstract

This paper studies business cycle interdependence among the industrialized countries since 1958. Using the spillover index methodology recently proposed by Diebold and Yilmaz (2009a) and based on the generalized VAR framework, we develop an alternative measure of comovement of macroeconomic aggregates across countries. We have several important results. First, the spillover index fluctuates over time, increasing substantially following the post-1973 U.S. recessions. Secondly, the band within which the spillover index fluctuates follows an upward trend since the start of the globalization process in the early 1990s. Thirdly, the spillover index recorded the sharpest increase ever following the peak of the global financial crisis in September 2008, reaching a record level as of December 2008. We also derive measures of directional spillovers and show that the U.S. (1980s and 2000s) and Japan (1970s and 2000s) are the major transmitters of shocks to other countries. Finally, during the current global economic recession shocks mostly originated from the United States and spread to other industrialized countries.