International Business Cycles: World, Region, and Country-Specific Factors

Abstract

The paper investigates the common dynamic properties of business cycle fluctuations across countries, regions and the world. We employ a Bayesian dynamic latent factor model to estimate common components in main macroeconomic aggregates (output, consumption and investment) in a sixty-country sample covering seven regions of the world. In particular, we simultaneously estimate (i) a dynamic factor common to all aggregates/regions/countries (the world factor); (ii) a set of 7 regional dynamic factors common across aggregates within a region; (iii) 60 country factors to capture dynamic comovement across aggregates within each country; (iv) and a component for each aggregate that captures idiosyncratic dynamics. We decompose the volatility in each aggregate into the fraction due to the world, region, country, and idiosyncratic components. The results indicate that the world factor is an important source of volatility for aggregates in most countries, providing evidence for a world business cycle. We find that the region-specific factor plays only a minor role in explaining fluctuations in economic activity. While the world and regional factors together account for a larger share of fluctuations in output than in consumption, the country factor along with the idiosyncratic factor play a much larger role in explaining investment dynamics. We also compare and contrast how the three aggregates in each country relate to the world, region and country factors, and document similarities and differences across regions, countries and aggregates. We link the empirical results to the economic structure of the countries in the sample.