Business Cycle Synchronization Research Articles

Impact of sub-national synchronization on the behavior of national business cycles in emerging economies with inflation targeting

PurposeThe purpose of this paper is to assess sub-national business cycle (BC) synchronization's impact on national cycles in four emerging markets economies with inflation targeting (IT-EMEs): Brazil, Colombia, South Korea and Mexico.Design/methodology/approachThe authors use panel data models with fixed-effects and distributed lags.FindingsThe authors disclosed that sub-national synchronization increased national cycle amplitudes during expansion and recession phases. The authors also noticed that South Korea exhibited a more pronounced effect compared to Latin American countries, and this seemed to be associated with differences in the homogeneity of the production structures in the regions of these countries.Research limitations/implicationsThe authors cautioned that contrasting the findings with prior research on the effects of regional BC synchronization in IT-EMEs or with studies in different geographical contexts, is not possible due to the absence of prior research endeavors with this specific focus.Originality/valueThis study constitutes a first attempt to explain the impact of subnational cycle synchronization on the magnitude of national cycles in four IT-EMEs.

Business cycle synchronization and sustainable trade development in Africa: The role of capital mobility

AbstractThe literature has overlooked the significance of business cycle synchronization in sustainable trade development, particularly with regard to trade‐adjusted carbon emissions. Further, how capital mobility affect the nexus between business cycle synchronization and sustainable trade development is an area that is yet to be explored. This paper examines the role of capital mobility in the nexus between business cycle synchronization and sustainable trade development using the panel corrected standard errors model in 30 African economies for the period 2006–2020, thus addressing the gaps in the previous studies. We concluded that: First, the direct effects of business cycle synchronization worsen sustainable trade development in Africa. Second, capital mobility promotes sustainable trade development in Africa. Third, capital mobility may be a viable instrument to mitigating the detrimental effects of synchronized business cycles on the sustainable trade development in Africa. Fourth, our research contributes to the extant literature by determining the threshold at which capital mobility can affect the association between synchronized business cycles and sustainable trade growth. Fifth, our study revealed that business cycle synchronization and capital mobility have a causal relationship with sustainable trade development in Africa. The concluding remarks section includes policy implications.

Capital flow dynamics and the synchronization of financial cycles and business cycles in emerging market economies

This study assesses the dynamics of capital flow, financial cycles, and business cycles in Emerging Market Economies (EMEs). We show that: (a) capital flow cycles tend to be more volatile than financial and business cycles, (b) although significant heterogeneities exist in the dynamics of these cycles across EMEs, financial and business cycles tend to be similar in terms of amplitudes, (c) significant concordance exists between different cycles and between the same cycles across countries, and (d) capital flow cycles tend to lead financial and business cycles. These findings provide clear guidance on the use of central bank policy mix strategy in response to capital flows, financial, and business cycles. Our results also imply strong interconnection between EMEs, in the sense that they appear to simultaneously experience expansions and recessions.

International business cycle synchronization: A synthetic assessment

We synthetically assess the three major transmission channels of international business cycles: bilateral trade, foreign direct investment (FDI), and portfolio investment flows between countries, while considering country-time heterogeneity with multiple fixed effects. Using the data of 65 countries during 2004–2019, we find that real and financial integration generates heterogeneous impacts on business cycle comovement. Trade integration, particularly through intermediate input trade, drives business cycle synchronization, and its impact has been more pronounced after the global financial crisis. This may be due to deepening intra-industry trade and dense global value chains. We also find greenfield FDI leads to business cycle synchronization when considering its time-lags. Higher short-term debt market integration is also associated with more synchronized business cycle comovement, implying that balance sheet effects and the related credit cycle can exert influence on business cycle comovement.

Bilateral production integration and business cycle synchronization

ABSTRACT This paper constructs a bilateral production integration (BPI) index to evaluate the closeness of the production relationship between countries under the perspective of fragmented international supply chains. It also verifies the correlations between the BPI index and business cycle synchronization. Empirical test results show that the constructed BPI index has a significant impact on business cycle synchronization, confirming that countries with closer production relations tend to have a consistent business cycle. Compared with the index in previous literature, this index has better statistical properties, overcomes endogeneity problems and passes robustness tests.

Transmission channels of the cohesion policy: direct and indirect effects on EA synchronicity

This study focuses on the examination of the side effects of the European cohesion policy (ECP), in particular, the direct and indirect effects of the European structural and investment (ESI) funds on business cycle co-movement in the Euro area (EA) countries. The results of analysis performed using the simultaneous equations framework in the 2000–2019 period reveal that increasing ESI payments within the cohesion policy have overall contributed to more synchronized EA business cycles. Even though the ESI payments do not seem to directly support synchronization, probably because of their procyclical nature, we find that the unintended benefits of the ESI payments with respect to the synchronization lie in their indirect positive effects, which outweigh the negative direct effect. The total positive effect of the ECP emerges because increasing investment from the ESI funds promotes the EA business cycle synchronization via trade, bilateral FDI, and income similarity. Meanwhile, similar evidence has not been confirmed for the specialization channel.

Business Cycle Synchronization between the European Union and Korea

Business Cycle Synchronization between the European Union and Korea

Business cycle synchronization and its determinants in the OECD countries: panel data evidence

ABSTRACT The primary determinants of business cycle synchronization among OECD countries and their interactions are examined using panel Granger causality tests, single-equation panel regressions, simultaneous equations model error component three-stage least squares (EC3SLS), and cross-sectional 3SLS econometric techniques. The sample spans the years 1990 through 2021. The results demonstrate the direct and indirect effects of the key macroeconomic variables on the synchronization of the business cycles of the sample economies, as well as the complementary and competing nature of these variables. The magnitude and significance of these macroeconomic factors in relation to the business cycle synchronization before and after the global financial crisis of 2009 are also examined in this study. Furthermore, the analysis supports the ex-post argument for entering the euro currency union. The study article contributes by providing direction for future empirical research on the sources and propagation mechanisms of international business cycle transmission.

Comparing the dynamics of financial and business cycles in the BRICS countries

Subject. The BRICS countries are among the fastest developing and growing economies. However, research on relationship between their financial and business cycles is insufficient. The article intends to address this gap and provide such information. Objectives. The aim is to determine the main characteristics of cycle phases (amplitude and duration) for the BRICS countries and to assess the degree of their synchronization. Methods. The study employs an algorithm for periodization of various phases of financial and business cycles, proposed by D. Harding and A. Pagan in 2003, the analysis of concordance coefficients to determine the degree of synchronization of different cycles, and the logistic regression to quantify the probability of recession in the real sector, if there is a crisis in the financial sector. Results. The findings revealed a high degree of synchronization of financial and business cycles in the BRICS countries, comparable to the EU member States. At the same time, the degree of synchronization changes during crisis events and after political decisions. The degree of synchronization of business cycles turns out to be much higher than financial cycles. Conclusions. The findings should be considered when coordinating the economic policies of the BRICS countries. Using certain fiscal, monetary, or macroprudential tools, countries should take into account that their decisions will also affect other member countries of this organization.

Business Cycles Synchronization between Baltic and Western European Countries

Business Cycles Synchronization between Baltic and Western European Countries

THE INDONESIA-MIDDLE EAST BUSINESS CYCLE SYNCHRONIZATION

This study aims to analyze the business cycle synchronization (BCS) between Indonesia and 14 Middle Eastern countries and its determinants. The BCS was measured using BCS Index. The panel data was analysed using Feasible General Least Square with estimated coefficients. The results show that the Indonesia-Middle East BCS is strong in terms of index and trend. Trade openness positively and significantly affects the BCS. This study provides evidence for the endogeneity of trade relations and the BCS. Price factors, such as inflation and exchange rates, are more difficult to forecast. This information allows stakeholders to promote Indonesia’s open trade policies and liberalization in the Middle East. This study proposes an update for how Indonesia and Middle East have benefited from the openness of trade and investment that exists between them. The BCS indices and trends in the two regions are important sources for expanding their economic partnership.JEL: E32, F13, N95, C33.

Macroprudential and Monetary Policy Interactions and Coordination in South Africa: Evidence from Business and Financial Cycle Synchronisation

The article reports on the interactions and possibility of coordination between macroprudential and monetary policies in South Africa, based on business and financial cycles synchronisation. To this end, relying on financial and economic time series indicators spanning the period 2000M01–2018M12, a two-step Markov switching dynamic factor model was adopted for the measurement of composite indices, while both the dynamic conditional correlations and asymmetric generalised dynamic conditional correlations models were adopted for synchronisation analysis, together with the Metcalfe scale of coordination. The empirical evidence obtained is such that, under conditions of financial and real economic stress in South Africa, when there is crisis management rather than crisis prevention, macroprudential policy and monetary policy decisions are complementary. Therefore, there will be limited/no need for coordination between the two policy decisions. However, under normal times when there is crisis prevention rather than management, macroprudential policy and monetary policy decisions are noncomplementary; hence, the greatest degree of coordination is warranted, even though it might not be easy. Therefore, we conclude that it is possible to the coordinate the conduct of macroprudential, and monetary policies based on the synchronicity of business and financial cycles.

Economic integration and consumption risk sharing: A comparison of Eurozone and OECD countries

Economic theory predicts that economic integration can facilitate improvements in international consumption risk sharing. We test this proposition by comparing risk sharing among Eurozone members and members of the Organisation for Economic Co-operation and Development (OECD) using a dynamic common correlated effects mean group estimator (DCCEMG). The results reveal that the OECD members outperform the Eurozone members in terms of short run and long run risk sharing, despite the barriers to risk sharing being considerably lower among the latter. We attribute this outcome to lower business cycle synchronization and stock return correlations among OECD members, which creates better opportunities to share risk within the group. The results highlight the trade-off between the benefits of business cycle synchronization and international risk sharing. More tightly integrated economies, facilitate trade in assets that promotes better portfolio diversification, while at the same time are characterized by higher business cycle synchronization that depletes agents of risk sharing opportunities. Consequently, our results give strong support to the hypothesis of “diminishing international diversification potential”. However, the benefits associated with the improved risk sharing are increasing with the number of countries in the monetary union.

Commodity exports, financial frictions, and international spillovers

This paper offers a solution to the international co-movement puzzle found in open-economy macroeconomic models. We develop a small open economy (SOE) dynamic stochastic general equilibrium (DSGE) model describing three endogenous channels that capture spillovers from the world to a commodity exporter: a world commodity price channel, a domestic commodity supply channel, and a financial channel. We estimate our model with Bayesian methods on two commodity-exporting SOEs, namely Canada and South Africa. In addition to explaining international business cycle synchronization, the new model attributes an important fraction of business cycle fluctuations to foreign shocks in the SOEs.

Positive externalities of the EU cohesion policy: Toward more synchronised CEE countries?

AbstractThe aim of this paper is to examine the role of the payments from the European Cohesion Policy (ECP) in the business cycle synchronisation of the EU–28 countries in the time period 2000–2016. The emphasis is especially placed on the Central and Eastern European (CEE) countries, given their status as the biggest ECP recipients; we investigate whether the ECP can serve as an instrument to promote their synchronisation which presents one of the prerequisites for the adoption of common monetary policy in the Economic and Monetary Union (EMU). By applying a panel instrumental variables estimation, our results suggest that the ECP provides a positive externality regarding increased synchronicity in the EMU, suggesting that the ECP should be further strengthened to foster business synchronicity in the Euro Area. Further analysis reveals that the systematically identified driving forces are the European Regional Development Fund (ERDF) and the Cohesion Fund (CF). The current European recovery plan ‘Next Generation EU’ could, therefore, have a promoting effect on the EMU’s monetary policy if it is designed as an additional structural investment fund promoting financial and trade integration.

GVC trade and business cycle synchronization between China and belt-road countries

This paper investigates the role of global value chain (GVC) trade in explaining bilateral business cycle synchronization between China and the Belt and Road countries in the context of prevailing GVC specialization. We construct two indicators of GVC trade that capture the third country effect within GVCs by using the ADB-MRIO2021 database. The empirical findings identify a positive and strong correlation of GVC trade with business cycle synchronization, and the channel through which GVC trade transmits the business cycle is stronger than that of gross trade. In addition, GVC trade in both manufacturing and service industries is significantly correlated with economic synchronization. Moreover, lower similarity in industrial structure strengthens the positive effect of GVC trade on business cycle synchronization. The findings demonstrate China's demand-and-supply spillovers in the positive transmission of business cycle synchronization across the Belt and Road countries.

Macroeconomic stabilisation properties of a euro area unemployment insurance scheme

In this paper we use a medium-scale DSGE model to quantitatively assess the macroeconomic stabilisation properties of a supranational unemployment insurance scheme. The model is calibrated to the euro area’s core and periphery and features a rich fiscal sector, sovereign risk premia and labour market frictions. Adopting both simple policy rules and optimal policies for the centralised insurance scheme, our simulations point to enhanced business cycle synchronisation and inter-regional consumption smoothing. The results suggest a sizeable reduction in the volatility of macroeconomic aggregates at the region-level, while the cross-regional correlation of unemployment and inflation increases significantly, compared to the decentralised setting. The higher degree of inter-regional risk-sharing comes at the cost of sizable fiscal transfers. Limiting such transfers via claw-back mechanisms reduces the degree of stabilisation across countries.

Business Cycle Synchronization of CEE Countries with the Euro Area. Between Core and Periphery

Business Cycle Synchronization of CEE Countries with the Euro Area. Between Core and Periphery

Business cycle synchronization and African monetary union: A wavelet analysis

In this paper, we analyze the feasibility of an African monetary union based on the necessary condition of business cycle synchronization. In this regard, we examine the synchronization of growth cycles between five Regional Economic Communities (RECs) that will have to merge to form an African monetary union: the East African Community; the Economic Community of Central African States; the Economic Community of West African States; the Southern African Development Community; and the Arab Maghreb Union. To do this, we use a new continuous wavelet approach. Results show evidence of heterogeneous synchronization across time and horizons between the RECs. Controlling for the influence of some countries' membership in several RECs at the same time, the synchronization landscape does not improve. Overall, our results suggest that business cycle synchronization across the RECs has not yet reached a sufficient level to allow African countries to benefit from a common monetary policy.

Industrial linkage and clustered regional business cycles in China

This paper applies the common Markov-switching panel data model from Hamilton and Owyang (2012) to study the similarities and differences across China’s provinces with different industrial linkage characteristics in terms of the timing of entering a contraction. This paper first derives the national business cycles, thus finding short-term contractions not well identified in the existing literature. Second, this paper classifies 30 provinces into four clusters based on the input–output linkages between industries to study the similarities and differences across the provincial business cycles. The results of this paper show a few regional business cycles coincide with the nation’s, but most idiosyncratic cluster contractions exhibit differences in timing around the national contractions. The results also find that contractions of some clusters are likely to spread nationwide. Finally, this paper investigates the reasons for business cycle synchronization.