International input–output linkages and changing business cycle volatility

Abstract

We quantify the effects of changes in international input–output linkages on the nature of business cycles. We build a multi-country international business cycle model with manufacturing and non-manufacturing sectors that matches the input–output structure within and across countries. We find that, in our 23-country sample, changes in the international input–output linkages between 1970 and 2007 have led to a drop in output volatility in all countries, explaining up to a half of the drop in output volatility in a median country observed in the data. In the model, stronger international linkages tend to stabilize output in response to domestic shocks, and destabilize for foreign shocks. Since foreign shocks still play a modest role in driving domestic business cycles, the stabilization effects dominate. Nevertheless, changing international linkages have generated larger shock transmission across countries, increasing the risk of a global recession.