International Business Cycle Synchronization Research Articles

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.

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.

Low pass-through and international synchronization in general equilibrium: Reassessing vertical integration

We investigate the difficulties of the canonical open New Keynesian model to i) reproduce the observed exchange rate pass-through disconnect, i.e. a pass-through high for import prices and low for consumer prices, and ii) to generate international business cycle synchronization. The literature tackled them separately: i) strategic complementarities for exporting firms to mitigate the pass-through to consumer prices and ii) intermediate inputs trade to enhance cross-border spillovers. We prove that foreign intermediate inputs also efficiently address the pass-through dimension, but, unlike strategic complementarities, solve the exchange rate pass-through disconnect puzzle. These results carry over to the general equilibrium effects of a depreciation. Furthermore, we show analytically that both types of vertical integration weaken sharply the expenditure switching effect. This feature strengthens real synchronization in response to productivity and monetary policy shocks, but lowers it in response to private demand shocks, a point which complements the existing literature.

Topological characteristics of international business cycle synchronization: A network analysis of the BRI economies.

Based on the GDP constant 2010 US$ from the World Bank, this paper uses the instantaneous quasi-correlation coefficient to measure the business cycle synchronization linkages among 53 Belt and Road Initiative (BRI) economies from 2000 to 2019, and empirically studies the topological characteristics of the Business Cycle Synchronization Network (BCSN) with the help of complex network analysis method. The main conclusions are as follows: First, the BCSN density and efficiency of BRI economies are still low, and it presents a topological feature of "small world". Second, the individual characteristics of the economies in the network are obviously different. Among them, China's relative influence is significantly increased, but its betweenness centrality level is still low. Third, since the inception of BRI, the topological characteristics of BCSN of BRI economies have undergone great changes, and their topological evolution has gradually reflected the characteristic of self-stability.

International Business Cycle Synchronization: A Synthetic Assessment

International Business Cycle Synchronization: A Synthetic Assessment

Testing for international business cycles: A multilevel factor model with stochastic factor selection

The empirical literature on common international business cycles has largely ignored model misspecification in estimated factor models as the various cycles are typically imposed but not tested for. This paper proposes a Bayesian stochastic factor selection approach for multilevel factor models. The procedure is applied to a three-level dynamic factor model with a global factor, six regional factors and three development level factors. We estimate the factor model using real GDP growth data for a panel of 60 countries over the period 1961−2017. We find robust evidence for the presence of a global business cycle, four regional cycles (Europe, North America, Latin America and Asia) and two development level cycles (industrial countries and emerging market economies). This suggests that both geographical proximity and the development level of countries are important dimensions of international business cycle synchronization that should be considered simultaneously, a point not previously made in the existing synchronization literature.

Explaining International Business Cycle Synchronization: Recursive Preferences and the Terms of Trade Channel

The business cycles of advanced economies are synchronized. Standard macro models fail to explain that fact. This paper presents a simple model of a two-country, two-traded-good, complete-financial-markets world in which country-specific productivity shocks generate business cycles that are highly correlated internationally. The model assumes recursive intertemporal preferences (Epstein-Zin-Weil), and a muted response of labor hours to household wealth changes (due to Greenwood-Hercowitz-Huffman period utility and demand-determined employment under rigid wages). Recursive intertemporal preferences magnify the terms of trade response to country-specific shocks. Hence, a productivity (and GDP) increase in a given country triggers a strong improvement of the foreign country’s terms of trade, which raises foreign labor demand. With a muted labor wealth effect, foreign labor and GDP rise, i.e. domestic and foreign real activity comove positively.

Financial frictions, interest rate dynamics, and international business cycle synchronization

AbstractA two‐country real business cycle model with national endogenous borrowing constraints and working capital requirements can account for the high level of international co‐movements. The effects of technology shocks are transmitted internationally through the dynamics of the interest rate. Specifically, the borrowing mechanism brings about a wedge between the real interest rate and the expected marginal product of capital, such that interest rates fall following positive technology shocks. A lower interest rate induces more investment by Foreign firms, which in turn contribute to greater synchronization of economic activities across countries. Moreover, terms of trade amplify the effects of technology shocks.

Explaining International Business Cycle Synchronization: Recursive Preferences and the Terms of Trade Channel

The business cycles of advanced economies are synchronized. Standard macro models fail to explain that fact. This paper presents a simple model of a two-country, two-traded good, complete-financial-markets world in which country-specific productivity shocks generate business cycles that are highly correlated internationally. The model assumes recursive intertemporal preferences (Epstein-Zin-Weil), and a muted response of labor hours to household wealth changes (due to Greenwood-Hercowitz-Huffman period utility and demand-determined employment under rigid wages). Recursive intertemporal preferences magnify the terms of trade response to country-specific shocks. Hence, a productivity (and GDP) increase in a given country triggers a strong improvement of the foreign country’s terms of trade, which raises foreign labor demand. With a muted labor wealth effect, foreign labor and GDP rise, i.e. domestic and foreign real activity commove positively.

Explaining International Business Cycle Synchronization: Recursive Preferences and the Terms of Trade Channel

The business cycles of advanced economies are synchronized. Standard macro models fail to explain that fact. This paper presents a simple model of a two-country, two-traded-good, complete-financial-markets world in which country-specific productivity shocks generate business cycles that are highly correlated internationally. The model assumes recursive intertemporal preferences (Epstein-Zin-Weil), and a muted response of labor hours to household wealth changes (due to Greenwood-Hercowitz-Huffman period utility and demand-determined employment under rigid wages). Recursive intertemporal preferences magnify the terms of trade response to country-specific shocks. Hence, a productivity (and GDP) increase in a given country triggers a strong improvement of the foreign country’s terms of trade, which raises foreign labor demand. With a muted labor wealth effect, foreign labor and GDP rise, i.e. domestic and foreign real activity commove positively.

International business cycle synchronization since the 1870s: Evidence from a novel network approach

In this study, we examine the issue of business cycle synchronization from a historical perspective in 27 developed and developing countries. Based on a novel complex network approach, the Threshold-Minimum Dominating Set (T-MDS), our results reveal heterogeneous patterns of international business cycle synchronization during fundamental globalization periods since the 1870s. In particular, the proposed methodology reveals that worldwide business cycles de-coupled during the Gold Standard, though they were synchronized during the Great Depression. The Bretton Woods era was associated with a lower degree of synchronization as compared to that during the Great Depression, while worldwide business cycle synchronization increased to unprecedented levels during the latest period of floating exchange rates and the Great Recession.

International Business Cycle Synchronization Since the 1870s: Evidence from a Novel Network Approach

International Business Cycle Synchronization Since the 1870s: Evidence from a Novel Network Approach

Business Cycles Synchronicity and Income Levels: Has Globalisation Brought us Closer Than Ever?

Research on business cycle linkages shows a tendency to model countries of relatively the same income levels jointly. However, the issue of whether these countries move along the same business cycles has not been formally investigated in the literature. In this paper, we take this approach and investigate whether each group of countries follows its own dynamics and is therefore subjected to the same business cycle and whether these cycles are independent of each other across income groups. Results indicate that high income per capita countries (HICs) tend to be guided by stronger similarity in business cycles than countries in the middle (MICs) and low income (LICs) groups. In search for an explanation of the business cycles synchronicity observed, panel data analysis was explored. The results from the robust fixed effects estimation show neither trade openness nor shocks to consumption underlie international business cycle synchronization, but rather shocks to oil prices.

Business Cycles Synchronicity and Income Levels: Has Globalization Brought Us Closer than Ever?

Research on business cycle linkages show a tendency to model countries of relatively the same income level jointly. However, the issue of whether countries with the same income level move along the same business cycles has not been investigated formally. The recent push by regional/economic bloc of countries toward the adoption of one currency tends to suggest an interdependence of macroeconomic activities but not necessarily a common cycle. In this paper, we use real income per capita from the United Nations Statistical Database based on income classification by the World Bank and the nonparametric measure of cycle synchronicity proposed by Mink, Jacobs, and de Haan (2007) to develop a two-step approach to investigate the linkage between business cycles and income levels. First, we examine the business cycles of each category of countries to determine whether each group of countries follows its own dynamics and is therefore subjected to the same business cycle and these cycles are independent of each other across groups. Second, we use panel data analysis in search for an explanation of the synchronicity of the cycles observed. The overall results indicate that high income per capita countries (HICs) tend to be guided by stronger similarity in business cycles than countries in the middle (MICs) and low income (LICs) groups. The synchronicity ratios are on average 51, 50, 54, 73, and 100 percent for the LICs, low middle income countries (LMCs), upper middle income countries (UMCs), HICs - OECD, and HICs - non-OECD countries, respectively. We also determined that across groups, the wavelength was common in most of the countries suggesting the existence of a common world cycle. The results from the robust fixed effects estimation show that real oil price is consistently significant in explaining the synchronicity of output gaps.Research on business cycle linkages shows a tendency to model countries of relatively the same income levels jointly. However, the issue of whether these countries move along the same business cycles has not been formally investigated in the literature. In this paper, we take this approach and investigate whether each group of countries follows its own dynamics and is therefore subjected to the same business cycle and whether these cycles are independent of each other across income groups. Results indicate that high income per capita countries (HICs) tend to be guided by stronger similarity in business cycles than countries in the middle (MICs) and low income (LICs) groups. In search for an explanation of the business cycles synchronicity observed, panel data analysis was explored. The results from the robust fixed effects estimation show neither trade openness nor shocks to consumption underlie international business cycle synchronization, but rather shocks to oil prices.

The role of production fragmentation in international business cycle synchronization in East Asia

This paper analyzes factors contributing to the observed increase in international business cycle synchronization between eight East Asian developing countries and the major developed economies of Japan and the United States. To this end, a two-country dynamic general equilibrium (DGE) model is proposed which focuses on the role of production fragmentation among these countries. A key feature of the model is that it includes the trade in differentiated capital goods, which are added to the capital stock for production, and the technology embodied in these capital goods. The parameters of the model are calibrated using actual data of the countries included. Model simulations are conducted for two periods (1993–1997 and 1999–2005), before and after the Asian financial crisis, showing that the increase in business cycle synchronization can be attributed mainly to the growing fragmentation of production activities.

MEASURING THE INTERMITTENT SYNCHRONICITY OF MACROECONOMIC GROWTH IN EUROPE

Synchronization of growth rates are an important feature of international business cycles, particularly in relation to regional integration projects such as the single currency in Europe. Synchronization of growth rates clearly enhances the effectiveness of European Central Bank monetary policy, ensuring that policy changes are attuned to the dynamics of growth and business cycles in the majority of member states. In this paper, a dissimilarity metric is constructed by measuring the topological differences between the GDP growth patterns in recurrence plots for individual countries. The results show that synchronization of growth rates were higher among the euro area member states during the second half of the 1980s and from 1997 to roughly 2002. Apart from these two time periods, euro area member states do not appear to be more synchronized than a group of major international countries, suggesting that apart from specific times when European integration initiatives were being implemented, globalization was likely the dominant factor behind international business cycle synchronization.

BUSINESS CYCLE SYNCHRONIZATION SINCE 1880*

This paper studies the international business cycle behaviour across 25 advanced and emerging market economies for which 125 years of annual GDP data are available. The picture that emerges is more fragmented than the one drawn by studies that focused on a narrower set of advanced market economies. The paper offers evidence in favour of a secular increase in international business cycle synchronization within a group of European and a group of English‐speaking economies that started during 1950–1973 and accelerated since 1973. Yet, in other regions of the world, country‐specific shocks are still the dominant forces of business cycle dynamics.

Business Cycle Comovement and Labor Market Institutions: An Empirical Investigation

This paper examines the empirical link between labor market institutions and international business cycle synchronization. Using a data panel of 20 OECD countries over the 1964–2003 period, we evaluate how cross-country labor market heterogeneity affects business cycle comovement. Our estimation strategy controls for a large set of possible factors influencing cross-country GDP correlation, which allows a comparison of our results with those found in previous studies. We find that bilateral trade, trade similarity, monetary and fiscal convergence, as well as EMU membership lead to more synchronized cycles. Our results show that labor market regulations affect the extent of business cycle synchronization. Disparities in employment protection laws and direct taxation tend to lower international comovement while divergence in union density, unemployment benefits, and indirect taxation enhance cross-country correlations. The level of labor market regulations also matters. Heavier employment taxes are found to raise GDP comovement.

Financial Regulation, Financial Globalization and the Synchronization of Economic Activity

We identify the effect of financial integration on international business cycle synchronization, by utilizing a confidential database on banks’ bilateral exposure and employing a country-pair panel instrumental variables approach. Countries that become more integrated over time have less synchronized growth patterns, conditional on global shocks and country-pair factors. To account for reverse causality and measurement error, we exploit variation in the transposition dates of financial legislation. We find that increases in financial integration stemming from regulatory harmonization policies are followed by more divergent cycles. Our results contrast with those of the previous studies which suffer from the standard identification problems. JEL Classification: E32, F15, F36, G21, G28, O16

Vertical Specialization and International Business Cycle Synchronization

We explore the impact of vertical specialization—trade in goods across multiple stages of production—on the relationship between trade and international business cycle synchronization. We develop a model in which the degree of vertical specialization is endogenously determined by comparative advantage across heterogeneous goods and varies with trade barriers between countries. We show analytically that fluctuations in measured productivity in our model are not linked across countries through trade, despite the greater transmission of technology shocks implied by higher degrees of vertical specialization. In numerical simulations, we find this transmission is insufficient in generating substantial dependence of business cycle synchronization on trade intensity.