Abstract
Employing a Bayesian approach, we investigate the impact of international business cycles on the U.K. economy in the context of a smooth transition VAR. We find that the British business cycle is asymmetrically influenced by growth in the U.S., France and Germany. Overall, positive and negative shocks generating in the U.S. or France affect the U.K. in the same directions as the shock. However, a shock emanating from Germany, whether positive or negative, always exerts negative cumulative effects on the U.K. Further, a positive shock arising from Germany adversely affects the U.K. output growth more than a negative shock of the same size.
Highlights
The study of international business cycle linkages is of special importance to macroeconomic policy research
The present paper examines the impacts of international business cycles on the UK economy within the framework of a logistic smooth transition vector autoregression (LSTVAR) model
We find that the UK economy is sensitive to the fluctuations of international business cycles in a asymmetric form
Summary
The study of international business cycle linkages is of special importance to macroeconomic policy research. The present paper examines the impacts of international business cycles on the UK economy within the framework of a logistic smooth transition vector autoregression (LSTVAR) model. Business cycle linkages between the UK and the three aforementioned countries have been examined previously by, inter alia, Artis and Zhang (1997), Inklaar and Haan (2001), and Perez, Osborn and Artis (2006). Most of this literature focuses on exploring the business cycles synchronization rather than investigating the propagation of different types of shocks (such as positive and negative shocks or large and small shocks) across countries.
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