Transmission Of Business Cycles Research Articles

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.

Business cycle transmission between France and United Kingdom

PurposeThe literature mostly investigates the business cycle transmission of the United Kingdom (UK) and France as a part of a wider group (e.g. European Exchange Rate Mechanism or G7), despite their historical links and regional significance. Thus, herein paper aims to analyse the inter-dependence of these economies and how a shock from one of them affects the other for the data since 1978 to 2019.Design/methodology/approachIn this paper, first, preliminary statistics were calculated in order to describe the historical relationship between these countries. The econometric part estimates the vector auto-regression model (VAR) to assess the inter-dependence of the economies. VAR model allows further to inspect the impulse response functions that shows the shock dynamics from one country to another. In order to verify if a shock from one of the economies is important to another, the study uses granger causality test.FindingsThe study establishes a strong link between these countries. A business cycle is transmitted significantly between the economies of France and UK, with a single standard deviation shock from France resulting in a long term effect of 0.4% change in gross domestic product (GDP) of UK and 1% vice versa. Additionally changes in GDP of both of the countries significantly Granger-cause change to GDP of the corresponding economy.Originality/valueThis is the first empirical study investigating the business cycle transmission between France and UK and providing a quantitative assessment of their inter-dependence.

On the synchronization of banking financial indexes: a wavelet-based approach

Abstract We add to the discussion on the transmission of business cycles, by modeling worldwide banking sector indices cycle synchronization, accounting for the time-varying and frequency-specific behavior of the variables. Based on the multiple coherence, partial coherence, partial phase-difference, and partial gain, we find regions of strong and significant coherency between NAFTA partners, and in the European core: France, Germany, and the United Kingdom. Concerning such trade blocs, we also find strong performance in the period 2010-2012 in all frequencies, a period characterized by the sovereign debt crisis in some European countries.

An ocean apart? The effects of US business cycles on Chinese business cycles

This study investigates the economic interdependence between China and the United States. In view of the growing trade and investment between China and the United States, and the reaction of the Chinese economy to the US subprime mortgage crisis, one might reasonably ask, what effect do US business cycles have upon the Chinese economy? We approach this problem by examining various channels of economic interaction, including international trade and foreign direct investment between the two countries. We use regressions, the Markov switching vector autoregressive model, and recursive correlations in an attempt to measure business cycle transmission from the United States to China using annual, quarterly, and monthly data.With both annual and quarterly GDP growth data between 1951 and 2001, business cycles in China and the US are not correlated. Starting in 1978, China undertook significant economic reforms and opened up to the rest of the world. After 1992, trade between the US and China increased, and US firms began to engage in FDI in China. After China's accession to the WTO in 2001, trade accelerated, and the correlation between the GDP growth rates of the US and China increased dramatically. There is evidence that the US has some marginally significant but increasing business cycle transmission effects upon China. Recursive correlations reveal that the synchronization between the two countries is strongest during economic downturns, suggesting that economic downturns and crises are responsible for most of the business cycle synchronization.

Does debt market integration amplify the international transmission of business cycles during financial crises?

The international transmission of real business cycles during financial crises differs dramatically depending on the type of debt market integration. Using a bilateral country-pair dataset of 57 countries covering the period 2001–2013, we find robust empirical evidence that short-term debt integration drove business cycle synchronization during the global financial crisis (GFC) and European sovereign debt crisis. However, we also find that long-term debt integration cushioned the international transmission of business cycles during the crises. Our findings distinguish two transmission channels of financial shocks: the balance sheet effect through the integrated short-term debt market and risk-sharing through long-term debt market integration.

The effects of external shocks on the business cycle in China: A structural change perspective

AbstractWe study the effects of external shocks on the business cycle in China and its sectors (agriculture, industry, and services) in terms of real GDP growth using several small‐dimensional VAR models with Cholesky identification for the period 1996–2014. We show that China—in particular its industrial sector—is susceptible to shocks, which can be related to a trade channel, a financial channel, and a confidence channel of business cycle transmission from major trading partner countries to the Chinese economy. We build on the previous literature by explicitly focusing on the response of the Chinese economy at the sectoral level and investigating the presence of confidence channels by analyzing the reaction in Chinese business and consumer confidence. If interpreted from the perspective of ongoing structural change and rebalancing in China, our findings can be interpreted as the result of a still very dominant industrial sector, and a previously export‐ and investment‐driven growth model. Tertiarization in China could be one way of increasing the economy's future resilience to external shocks. However, the future structure of both the industrial and service sectors may be very decisive.

Business Cycle Synchronization or Business Cycle Transmission? The Effect of the German Slowdown on the Italian Economy

This work analyses the effects of the slowdown that has hit Germany since 2018 on the Italian economy using data from Banca d’Italia’s Survey of Inflation and Growth Expectations. First, we briefly argue that these two economies are highly interconnected and describe the slowdown that has hampered the German economy. Using a difference-in-differences strategy, we show that since 2018, when the German economy weakened, Italian companies’ sentiment and assessment whose sales were oriented towards the German market was comparatively worse than that of other companies. This finding suggests that there is a transmission link between these two economies. Finally, using a forecasting model, we provide a quantification of these effects that finds that it would have been contemporaneous and relevant for GDP, lagging for the total investment. In contrast, we do not find any significant employment effect.

Research on the Business Cycle Transmission Mechanism and Related Policies of China and B&R Economies Including Coastal Cities

Li, L.Y. and Lu, P., 2020. Research on the business cycle transmission mechanism and related policies of China and B&R economies including coastal cities. In: Bai, X. and Zhou, H. (eds.), Advances in Water Resources, Environmental Protection, and Sustainable Development. Journal of Coastal Research, Special Issue No. 115, pp. 456-460. Coconut Creek (Florida), ISSN 0749-0208.This paper applies the panel Simultaneous Equations Model (SEM) and Three-Stage Least Squares (3SLS) to studying how the transmission mechanisms of bilateral trade, specialized division of labor, financial integration and policy coordination affect the business cycle co-movement between China and the B&R economies including coastal cities. The study finds that: 1) Bilateral trade, financial integration, the coordination of fiscal and monetary policies and B&R intergovernmental MOU have a significant role in promoting the co-movement of the economic cycle, while the specialized division of labor reduces the co-movement. 2) In terms of policy effects, the positive impact of B&R intergovernmental MOU on the co-movement outweighs the sum of that brought by the coordination of fiscal and monetary policies. 3) Relative importance of each transmission mechanism varies significantly. The transmission mechanisms considering coastal cities, sorted by their impact on the co-movement in descending order, are: bilateral trade, financial integration, B&R intergovernmental MOU and the specialized division of labor.

What Does High Frequency Identification Tell Us About the Transmission and Synchronization of Business Cycles?

We provide evidence for a causal link between the US economy and the global financial cycle. Using a unique intraday dataset, we show that US macroeconomic news releases have large and significant effects on global risky asset prices. Stock price indexes of 27 countries, the VIX, and commodity prices all jump instantaneously upon news releases. The responses of stock indexes co-move across countries and are large - often comparable in size to the response of the S&P 500. Further, US macroeconomic news frequently explains more than 15% of the quarterly variation in foreign stock markets. The joint behavior of stock prices and long-term bond yields suggests that systematic US monetary policy reactions to news do not drive the estimated effects. Instead, the evidence is consistent with a direct effect on investors' risk-taking capacity. Our findings show that a byproduct of the United States' central position in the global financial system is that news about its business cycle has large effects on global financial conditions.

Subprime borrowers, securitization and the transmission of business cycles

AbstractA growing literature (e.g., Jaffee et al. 2009, Acharya and Schnabl 2009) argues that securitization improves financial stability if the securitized assets are held by capital market participants, rather than financial intermediaries. I construct a quantitative macroeconomic model with a novel specification for mortgage‐backed securities (MBS) to evaluate this claim. My findings suggest that the existence of the securitization market stabilizes the economy under the condition that financial intermediaries do not engage in the acquisition of securitized assets. In the presence of large negative housing preference shocks, the drop in output in the first year after the shock is halved if subprime MBS are purchased by non‐financial agents rather than held by banks.

Endogenous Tradability, International Relative Prices, and the International Transmission of Business Cycles

This paper propose a two-country, dynamic, stochastic, general equilibrium (DSGE) model with endogenous tradability, product differentiation, variously determined physical capital, and an elastic labor supply to explore the propagation of business cycles across countries. The model successfully addresses international relative price dynamics (its appreciation with positive home productivity shock, called the ‘Harrod-Balassa-Samuelson Effect’) through the entry of producers and their cut-off productivities of exporting. The use of endogenous physical capital in the model induces a more realistic framework since the simulated model is compared to the U.S. investment data that covers spending on capital equipment, structures and inventories for producers’ entry and exit dynamics. Building the model with endogenous capital and elastic labor supply weakens the volatility of investment compared to conventional international real business cycle (IRBC) models. The model also accounts for several features of the data, such as the volatility of aggregate variables and their correlations with GDP.

Business cycle co-movements and transmission channels: evidence from China

This article examines the impacts of international trade, foreign direct investment (FDI) and industrial structure on international business cycle co-movements between China and its major trading partners. We investigate the principal transmission factors of business cycle co-movements and their contributions to China’s economic growth in the context of economic globalization. Through studying the 27 major trading partners during 1990–2015, we find that, from China’s perspective, the synchronization tendency was continuously growing before the 2008 financial crisis but slowed down or even reversed after the crisis. Bilateral trade intensity and FDI intensity contributed more to cyclical co-movement behaviors between China and its emerging market partners, but less to economic synchronization between China and its advanced economic partners. Industrial structure similarity, on the contrary, could explain the co-movement behaviors between China and its advanced economic partners, but not emerging market partners. China’s past economic growth was also significantly correlated with the economic performance of its non-Asian trading partners, but not Asian neighbors.

The transmission of business cycles: Lessons from the 2004 enlargement of the EU and the adoption of the euro

AbstractThis paper evaluates the macroeconomic interdependencies of seven Central and Eastern European Countries (CEECs) with the Euro Area (EA) through trade relationship. We estimate a near‐VAR model and simulate the responses of activity in those CEECs to output shocks for 12 former members of the EA before and after the 2004 enlargement of the European Union. During both periods, empirical results show that spillover effects come through the main economies of the EA: Germany, France and Italy. Furthermore, CEECs were more responsive to output shocks in the EA after 2004 than before (3.3 times more on average). Increases in spillover effects are larger for the three CEECs that adopted the Euro early (Slovenia, Slovakia and Estonia) than the other CEECs but without higher trade intensity with the EA. Our results show that trade effects are positive inside the same currency area but negative for the CEECs without the euro.

Tfp, News, and “Sentiments”: the International Transmission of Business Cycles

AbstractWe propose a novel identification scheme for a nontechnology business cycle shock, which we label “sentiment”. This is a shock orthogonal to identified surprise and news TFP shocks that maximize the short-run forecast error variance of an expectational variable, alternatively a GDP forecast or a consumer confidence index. We then estimate the international transmission of three identified shocks—surprise TFP, news of future TFP, and sentiment—from the United States to Canada. The US sentiment shock produces a business cycle in the United States, with output, hours, and consumption rising following a positive shock, and accounts for the bulk of the US short-run business cycle fluctuations. The sentiment shock also has a significant impact on Canadian macroaggregates. In the short run, it is more important than either the surprise or the news TFP shocks in generating business cycle comovement between the United States and Canada, accounting for over 40% of the forecast error variance of Canadian GDP and over one-third of Canadian hours, imports, and exports. The news shock is responsible for some comovement at 5–10 years, and surprise TFP innovations do not generate synchronization. We provide a simple theoretical framework to illustrate how the US sentiment shocks can transmit to Canada.

Exchange rate regimes and the international transmission of business cycles: Capital account openness matters

We investigate the role of exchange rate regimes in the international transmission of business cycles during the global financial crisis. We find that exchange rate regimes alone did not account for differences in the international transmission of business cycles during the crisis. However, analysis considering capital account openness and countries with currencies pegged to the U.S. dollar indicates that exchange rate regimes play an important role in shaping business cycle co-movement: adopting a fixed regime with high capital account openness (additionally) increased business cycle co-movement with the United States during the crisis, whereas U.S. dollar peggers with relatively restrictive capital accounts during the crisis were not found to affect business cycle transmission.

Exchange Rate Regimes and the International Transmission of Business Cycles: Capital Account Openness Matters

We investigate the role of exchange rate regimes in the international transmission of business cycles during the global financial crisis. We find that exchange rate regimes alone did not account for differences in the international transmission of business cycles during the crisis. However, analysis considering capital account openness and countries with currencies pegged to the U.S. dollar indicates that exchange rate regimes play an important role in shaping business cycle co-movement: adopting a fixed regime with high capital account openness (additionally) increased business cycle co-movement with the United States during the crisis, whereas U.S. dollar peggers with relatively restrictive capital accounts during the crisis were not found to affect business cycle transmission.

GCC monetary union and the transmission of business cycles: evidence from temporal correlations

The aim of this paper is to verify the readiness for monetary union among Gulf Cooperation Council (GCC) countries. To do so, we know that business cycle synchronisation is a good tool to test for the possible success of a monetary union. The empirical results for the GCC countries are close to those for the OECD and European Union countries, especially for the case of Saudi Arabia and the UAE. Thus, the economic and financial indicators are positive, implying that the GCC countries are ready for the creation of a monetary union, but political decisions will be more effective in reducing the barriers to the creation of this union.

GCC monetary union and the transmission of business cycles: evidence from temporal correlations

GCC monetary union and the transmission of business cycles: evidence from temporal correlations

Composite habits and international transmission of business cycles

This paper shows how internal habit formation defined over a composite of consumption and leisure can bring a two-country business cycle model closer to the data. Conditional on productivity shocks, our model reconciles with the data by closing the gap between cross-country correlations of consumption and output. It also predicts positive international correlations of investment and employment of the magnitude observed in the data. In other words, a rather parsimonious departure from a canonical two-country, two-good model goes a long way toward addressing two long-standing puzzles: the “quantity anomaly” and the “international comovement puzzle”.

Multinational Firms and International Business Cycle Transmission*

AbstractWe investigate how multinational firms contribute to the transmission of shocks across countries using a large multicountry firm-level data set that contains cross-border ownership information. We use these data to document two novel empirical patterns. First, foreign affiliate and headquarter sales exhibit strong positive comovement: a 10% growth in the sales of the headquarter is associated with a 2% growth in the sales of the affiliate. Second, shocks to the source country account for a significant fraction of the variation in sales growth at the source-destination level. We propose a parsimonious quantitative model to interpret these findings and to evaluate the role of multinational firms for international business cycle transmission. For the typical country, the impact of foreign shocks transmitted by all foreign multinationals combined is non-negligible, accounting for about 10% of aggregate productivity shocks. On the other hand, since bilateral multinational production shares are small, interdependence between most individual country pairs is minimal. Our results do reveal substantial heterogeneity in the strength of this mechanism, with the most integrated countries significantly more affected by foreign shocks.