Global Business Cycle Research Articles

Which Global Cycle? A Stochastic Factor Selection Approach for Global Macro-Financial Cycles

Abstract Instead of assuming a certain factor structure, we statistically test for the factor structure driving common global dynamics in macroeconomic and financial data by employing a stochastic factor selection approach. Using a sample of 16 developed countries from 1996Q1 to 2019Q4, we present strong empirical evidence of a global macro-financial cycle and an independent global financial cycle. Moreover, the global macro-financial cycle we estimate is essentially the global business cycle identified in the literature. It captures the common global macroeconomic dynamics and drives a significant share of the comovement in the financial sector. The remaining commonality in financial variables is driven by separate global financial cycles: the global credit cycle and the global capital flow cycle.

Asymmetric Effects of Local and Global Business Cycle Variations on the Sectoral Industrial Production in Singapore

Abstract This paper investigates the sensitivities of Singapore’s sectoral industrial production to local and global business cycle variations using the auto-regressive distributed lag (ARDL) model in the nonlinear and asymmetric cointegration framework. By employing monthly time series data from Jan 1983 to Dec 2022 the study corroborates the commonly held view that durable industries are pro-cyclic to thelocal business cycle. However, the nature of cyclic sensitivity is different if viewed from a global perspective. Industries including pharmaceutical, computer, and motor vehicles industries flourish in both the local and global business cycle booms. Almost all industries having long-run linkages with global industrial production are also affected by global production growth in the short run. However, consistent with earlier studies for Southeast Asian countries, very few industries exhibit short-run asymmetries in their relationship with local and global business cycles. We found that incorporating long-run information also improves the forecasting ability of sectoral industrial production growth in Singapore.

US Credit Market Uncertainty Spillovers and Global Business Cycles

US Credit Market Uncertainty Spillovers and Global Business Cycles

US uncertainty shocks on real and financial markets: A multi-country perspective

The international propagation of uncertainty shocks from the United States is not fully understood, despite extensive literature on domestic effects. This study examines the impact of U.S. financial, macroeconomic, and policy uncertainty on credit growth, stock prices, economic activity, bond yields, and inflation in five major recipients of U.S. foreign investment from 1950 to 2019. Findings highlight the pivotal role of U.S. financial uncertainty in driving global business cycles. Increased uncertainties in the U.S. financial sector negatively affect global economic activity by impeding credit and stock prices, limiting funding opportunities for firms and households worldwide. This underscores the significant influence of U.S. financial markets on global economic fluctuations.

Should I open to forecast? Implications from a multi-country unobserved components model with sparse factor stochastic volatility

In this paper, we assess whether and when multi-country studies pay off for forecasting inflation and output growth. Factor stochastic volatility is adopted to allow for cross-country linkages and model economies jointly. We estimate factors and rely on post-processing, rather than expert judgement, to obtain an estimate for the number of factors. This is different from most existing two-step approaches in the factor literature. Our approach is then used to extend the existing unobserved components model, which assumes that 34 economies are independent. The results suggest that allowing for cross-country linkages yields inflation and output growth forecasts that are highly competitive with those obtained from estimating economies independently. Zooming into the forecast performance over time reveals that allowing for cross-country linkages is of particular importance when interest centres on forecasting periods of uncertainty. Another key finding is that the estimated global factors are correlated with the domestic business cycle. We interpret this to mean that part of the variation captured in global factors reflects a global business cycle.

National culture and international business cycle co-movements

ABSTRACT We investigate the relationship between national culture and international business cycle co-movements. We first characterize international business cycle co-movements with a dynamic latent factor model that decomposes 101 countries’ real GDP growth rates into world, regional and country-specific factors and estimate the proportion of real GDP growth rate variance explained by the world, regional and country factors for each country. We then regress these proportions on each of the five dimensions of Hofstede’s national culture with a set of control variables. We find that four dimensions (except for power distance) are significantly related to business cycle co-movements, and they have different impacts. In countries with masculinity, uncertainty avoidance and long-term orientation preferences, the global factor explains a larger real GDP growth rate variance. Individualism weakens a country’s business cycle co-movement with the global business cycle. Countries with similar cultural values have similar economic structures and similar exposures to global shocks, which lead to business cycle co-movements. Our results are robust after addressing the issue of endogeneity and subsample analyses.

The currency channel of the global bank leverage cycle

The amplitude of leverage procyclicality is heterogeneous across banks and across countries. This paper introduces international diversification of bank balance sheets as a factor in this observed heterogeneity, with a special emphasis on currency diversification. Based on a new theoretical framework, it shows that the impact of international diversification on leverage procyclicality depends on the relative performance of economies, the global business cycle and the exchange rate regime. By altering the distribution of global bank portfolios, international diversification adds a currency channel to the risk channel of the global leverage cycle. Using granular data on banks located in Prance, the paper shows that the pre-crisis international diversification of banks increased leverage procyclicality during the 2008–2009 crisis. Focusing on the currency channel, namely the valuation effect of currency diversification, my results show that it had a negative effect on leverage procyclicality during this period. The currency channel thus helped to offset part of the increased risk caused by the crisis. These findings draw attention to the specific role of balance sheet currency diversification in financial stability risk.

Global value chains over business cycles

Global Value Chains (GVCs) now represent a key aspect of economic interdependence across countries. This paper makes two methodological contributions. First, it proposes a framework with which to decompose total production activities at the country, sector, or country-sector level into different types depending on whether they are for pure domestic demand, traditional international trade, simple GVC activities, and complex GVC activities. Second, this work proposes a set of GVC participation indices that improves on measures used in the literature. Upon applying this framework to Inter-Country Input-Output Tables, we find a number of interesting patterns connecting value chains and business cycles. First, the composition of global production has evolved dramatically since 1995. Second, production activities of complex GVC activities comove with global business cycles more than other types of production activities. Third, the level of GVC participation affects the performance of economic growth.

Composite global indicators from survey data: the Global Economic Barometers

This paper presents a coincident and a leading composite monthly indicator for the world business cycle—the Global Economic Barometers. Both target the world’s output growth rate and consist of economic tendency surveys results from many countries around the world. The calculation of these indicators comprises two main stages. The first consists of a variable selection procedure, in which a pre-set correlation threshold and the targeted leads to the reference series are used as selection criteria. In the second stage, the selected variables are combined and transformed into the respective composite indicators, computed as the first partial least squares factor with the reference series as response variable. We analyse the characteristics of the two new indicators in a pseudo real-time setting and demonstrate that both are useful additions to the small number of indicators for the global business cycle published so far. Finally, yet importantly, the Barometers were quick to plunge in the beginning of March 2020 and have since then given a reliable real-time reflection of the economic consequences of the Covid-19 pandemic.

The Global Business Cycle within the New Commodities and the Financial Cycle: An Empirical Evidence Based on a Multivariate Unobserved Components Model (UCM)

The Global Business Cycle within the New Commodities and the Financial Cycle: An Empirical Evidence Based on a Multivariate Unobserved Components Model (UCM)

От третьей промышленной революции — к четвертой (сравнительный обзор концепций)

The article describes the evolution of the theoretical concept of industrial transformation in the era of modern economic growth. Analysis of contemporary research literature brings to light the key perspectives on the role of industry in sustainable development and the influence of industrial changes on the global business cycles. Special emphasis is made on the concepts of third and fourth industrial revolutions in Russian and international research and the associated concepts such as “technological change”, “technological revolution”, and “innovation”. Among other things, the study discusses the difference between the Schumpeterian interpretation of long waves of economic growth and the concept of sequential change of techno-economic paradigms proposed by Carlota Perez. The conclusion is made that although economists may disagree about the sources and features of technological transformations as well as the problems they engender, the role of technology is generally seen as crucial to global structural changes. Regarding the Russian context, it is shown that as the centre of the global economy is shifting to the East, it is essential that the country’s government should stop fetishizing particular spheres of technological progress.

ПРОЦЕС КОНВЕРГЕНЦІЇ ГЛОБАЛЬНОГО ЕКОНОМІЧНОГО РОЗВИТКУ

The current stage of globalization creates a number of controversial problems, one of which is the growing disparities in economic development between developed and developing countries. Their solution places certain demands on the economic scientific community, which are related to finding adequate answers to the challenges of time. One of the main tasks in this direction is to implement a comprehensive approach to the study of the process of convergence of global economic development. Noting the intensification of scientific research by the European and domestic scientific community in various thematic areas of convergence of global economic development, it should be noted the lack of publications in which this scientific and practical problem was solved taking into account the specifics of different countries belonging to the modern world system. With this in mind, the purpose of the study is to determine the nature and content of the process of convergence of global economic development and identify problems that arise in overcoming the asymmetry between developed and developing countries. In the process of realization of this goal the influence of economic integration on the internationalization of economic life is revealed, the factors that accelerate the process of convergence of global economic development and its manifestations at the level of developed and developing countries are identified. The relationship between economic convergence, global synchronization and the global business cycle has been established. The scientific novelty of the study is to substantiate, based on the creative use of scientific publications of foreign and domestic scientists, ways and directions of achieving real convergence between countries belonging to the core of the world system, its semi-periphery and periphery For results of the study made some generalizations and conclusions that do not confirm the effect of "catching up" development for the vast majority of African and Asian countries, in contrast to post-socialist European countries. It is noted that solving the problem of convergence of global economic development is important for Ukraine. This is the one of the promising direction of further scientific development of the research problem.

Uncertainty and oil volatility: Evidence from shrinkage method

Prior studies argue economic policy uncertainty index (EPU) can successfully predict oil price volatility. This paper mainly sheds light on the forecasting ability of categorical EPU indexes for both WTI and Brent oil futures. To illustrate this problem, we extend the LASSO model with Markov two-stage regimes (MS-LASSO model) to better fit the nonlinear feature of oil volatility dynamic. Our empirical results provide empirical evidence that EPU index not only contains predictive information content for WTI and Brent oil volatility, but achieves higher realized utility. Notably, we find that the predictive ability of categorical EPU indexes is asymmetric through global financial crisis, business cycle and different market conditions. Additionally, the uncertainty index of sovereign debt and currency crises is the most frequent predictor selected by shrinkage method for both WTI and Brent oil volatility.

The interplay between oil and food commodity prices: Has it changed over time?

Using a structural time-varying-parameter Bayesian vector autoregression (TVP-BVAR) framework, this paper documents that oil price increases caused by oil supply disruptions did not affect food commodity prices before the start of the millennium, but had positive spillover effects in more recent periods and particularly in the era around the Great Recession. Likewise, shortfalls in global food commodity supply resulting from bad harvests have positive effects on crude oil prices since the early 2000s, in contrast to the preceding era. The econometric evidence suggests that these developments are not the consequence of the popular biofuels narrative and more likely the result of informational frictions about the global business cycle and information discovery in financialized commodity markets.

Economic convergence in a globalized world: The role of business cycle synchronization.

Increasing economic integration and global synchronization can be key for countries aiming to catch up in GDP per capita terms. Little attention has hitherto been placed in synchronization as determinant of convergence. In this paper we estimate the effect of economic globalization and synchronization on income convergence for a sample of 89 developed and developing countries in the period 1970-2015. We use a dynamic factor model and panel data techniques to undertake the objectives of the paper. We show that synchronized countries (those correlated with the factor) exhibit a higher response on GDP per capita growth with variations on the global business cycle. This implies that synchronization improves growth for that group in global expansionary phases, but also implies risks during global recessions. On the contrary, the effect on growth of an economic globalization index is less relevant for synchronized countries than for asynchronized countries. The latter result implies that asynchronized countries can benefit more increasing their levels of economic globalization.

Multi-Asset Value Payoff: Is Recent Underperformance Cyclical?

Recent value factor underperformance has called into question whether the value factor payoff is cyclically low, or if there are more structural challenges. We use a new approach to explore a link between the well-known macroeconomic exposures of traditional asset classes and those of value premia in a multi-asset context, focusing on country equities, bonds, and currencies in developed markets. Taking advantage of the cross-country inflation and growth expectations implicit in every value portfolio, we derive the net inflation and real growth characteristics embedded in each asset class carry portfolio at each point in time. Our analysis provides several insights: (1) Multi-asset value payoff is only weakly related to the global business cycle. (2) However, we find that the payoff to value portfolios is strongly linked to relative growth and inflation expectations across countries. (3) Over the last decade, we find that cheaper assets have had much lower net relative macro exposures compared to earlier time periods. This characteristic coincides with the period of unconventional central bank policies designed to lift global growth after the Global Financial Crisis (GFC).

Global Financial Risk Thresholds and Business Cycle Fluctuations: A Dynamic Heterogeneity Model Approach

ABSTRACT This study constructs a dynamic heterogeneity threshold model using unbalanced panel data from 146 countries/regions (1984–2017). The findings show that (1) financial risk has a non-linear effect on business cycle fluctuations and a significant global financial risk threshold effect; (2) the threshold of financial risk is significantly lower in emerging market economies than in developed and latecomer market economies; (3) in the long-run, regardless of the threshold effect, once financial risk expands, it will exacerbate business cycle fluctuations; and (4) the threshold effect of different potential financial risks on business cycle fluctuations is heterogeneous.

The global business cycle and speculative demand for crude oil

PurposeThis paper aims to better understand if speculative activity is a factor or even the main factor in the run-up of oil prices in the spot market, particularly in the recent price bubble that occurred in the period from mid-2003 to 2008.Design/methodology/approachThe methodology used is based on an existing vector autoregressive model proposed by Kilian and Murphy (2014), which is a structural model of the global market for crude oil that accounts for flow demand and flow supply shocks and speculative demand oil shocks.FindingsFrom the output of the authors’ structural model, the authors ruled out speculation as a factor of rising oil prices. The authors have found instead that the rapid oil demand caused by an unexpected increase in the global business cycle is the most accurate culprit. Despite the change of perspective in the speculative component, the authors’ conclusions concur with the findings of Kilian and Murphy (2014) and others.Originality/valueAs far as the authors are aware, this is the first time that a study has used as a spread oil variable, a speculative component of the real price, replacing the oil inventories considered by Kilian and Murphy (2014). Another contribution is that the model used allows estimating traditional oil demand elasticity in production and oil supply elasticity in spread movements, casting doubt on existing models with perfect price-inelastic output for crude oil.

The conditional volatility premium on currency portfolios

Our paper examines conditional risk-return relations in a number of currency investment strategies, while modeling economic states using a large number of underlying risk factors. We identify a time-varying relationship between currency returns and volatility risk for most currency portfolios. In particular, value and momentum portfolios present risk-return relationships which switch sign, depending upon economic states. The positive relationship for the value portfolio is associated with “flight to quality” periods and the mean reversion for nominal exchange rates during financial crises. The positive relationship for the momentum portfolio is linked to the US and global business cycles and investors require positive compensation for risk in recessions.

Macroeconomic Trends among Visegrád Countries, EU Balkans, and the U.S., 1991-2021

The paper provides an introduction to the special issue. It shows a sense in which VisegrĂĄd and Balkan EU countries are correlated in macroeconomic performance and integrated with the global business cycles. Using inflation rate levels as a starting point to characterize when these countries began their transitions, it shows that after 1996 both real GDP growth and real interest rates move together to a significant degree both with each other and with the US. This provides a background from which to view the paths since the collapse of the Soviet Union that these transition economies have taken. In addition, comparison is made to US money and banking policy, to provide an outline of how this may impact progress in the transition region. A subsequent summary of the other articles in the issue shows an inter-relation in their themes about how Central, Eastern, and Southeast Europe have progressed since 1991, and how these paths may be affected by Western economic policy. Implications for Central European audience: The paper shows that transition regions can be impacted by international financial integration, including to possible detriment when capital markets are regulated by policy that pushes real interest rates below their natural levels. Negative real interest rate policy since the 2008-2009 financial crisis and again during the Covid crisis may hasten the rise of autocratic democracy and limit social, political, and economic freedom.