International 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.

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.

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.

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.

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.

Offshore production and business cycle dynamics with heterogeneous firms

To examine the effect of offshoring through vertical FDI on the international transmission of business cycles, I propose a two-country model in which firms endogenously choose the location of their production plants over the business cycle. Firms face a sunk cost to enter the domestic market and an additional fixed cost to produce offshore. As such, the offshoring decision depends on the firm-specific productivity and on fluctuations in the relative cost of effective labor. The model generates a procyclical pattern of offshoring and dynamics along its extensive margin that are consistent with data from Mexico's maquiladora sector. The extensive margin enhances the procyclical response of the value added offshore to expansions in the home economy, as the number of offshoring firms mirrors the dynamics of firm entry at home. As a result, offshoring increases the comovement of output across economies, in line with the empirical evidence.

Animal Spirits and the International Transmission of Business Cycles

It is well-known that the high synchronization of the business cycles among industrial countries cannot easily be replicated in standard open economy macroeconomic models without assuming that the exogenous shocks hitting these countries are highly correlated. We develop a two-country behavioral macroeconomic model where the synchronization of the business cycle is produced endogenously. The main channel of synchronization occurs through a propagation of “animal spirits”, i.e. waves of optimism and pessimism that become correlated internationally. We find that this propagation occurs with relatively low levels of trade integration. We also study the transmission of demand and supply shocks from one country to the other and find that the size of this transmission also depends on animal spirits. As a result, the size of the transmission depends on the timing of the shock.

Lifestyle Habits and International Transmission of Business Cycles

Lifestyle Habits and International Transmission of Business Cycles

Entry, trade costs, and international business cycles

Are firm entry and fixed exporting costs relevant for understanding the international transmission of business cycles? We revisit this question using a model that includes entry, selection to exporting activity, physical capital accumulation and endogenous labor supply. We determine that once the stochastic process for exogenous productivity is calibrated to consider the endogenous dynamics in TFP created by the number of firms and the time series volatility of entry is calibrated to the data, our model yields minimal departures from the Backus et al. (1992) benchmark. The richer model shares all of the successes of the previous model in terms of the volatilities of aggregate quantities, as well as its failures, in terms of replicating patterns of international co-movement and the volatility of international relative prices.

ATTRIBUTION ERROR IN ECONOMIC VOTING: EVIDENCE FROM TRADE SHOCKS

This article exploits the international transmission of business cycles to examine the prevalence of attribution error in economic voting in a large panel of countries from 1990 to 2009. We find that voters, on average, exhibit a strong tendency to oust the incumbent governments during an economic downturn, regardless of whether the recession is home‐grown or merely imported from trading partners. However, we find important heterogeneity in the extent of attribution error. A split sample analysis shows that countries with more experienced voters, more educated voters, and possibly more informed voters—all conditions that have been shown to mitigate other voter agency problems—do better in distinguishing imported from domestic growth. (JEL E3, E6)

Financial integration and international business cycle co-movement

International business cycle transmission through integrated financial markets occurs through wealth and balance sheet effects. Balance sheet effects lead to business cycle convergence, but wealth effects lead to divergence. This paper shows empirically that debt market integration has a positive effect on co-movement, implying that balance sheet effects are the main conduit for international transmission through integrated debt markets. Equity market integration has a negative effect, implying that wealth effects are the main channel for international transmission through integrated equity markets. Distinguishing between wealth and balance sheet effects resolves some key discrepancies between empirical and theoretical findings in international macroeconomics.

Determinants of international transmission of business cycles to Turkish economy

This study aims to investigate the channels through which international business cycles are transmitted to Turkish economy. Our analysis follows two steps: i) business cycle transmission is measured using Longest Common Subsequence (LCS) method, a pattern recognition algorithm that accounts for the nonlinear and time-varying nature of business cycles and ii) the potential mechanisms of propagation of international business cycles are examined by specifying a panel regression model in which the LCS measure of synchronization is used as the dependent variable. Applying several panel estimation methods to the bilateral data from 22 countries over the 1998–2009 periods, we find that both trade and financial similarities are significant in the transmission of business cycles to Turkish economy. Especially, the results highlight the role of trade integration indicating that Turkish business cycles are closely linked with the business cycles of the members of European Custom Union.

Banks, Sovereign Debt, and the International Transmission of Business Cycles

This paper studies the international propagation of sovereign debt default. We posit a two-country economy where capital constrained banks grant loans to firms and invest in bonds issued by the domestic and the foreign government. The model economy is calibrated to data from Europe, with the two countries representing the Periphery (Greece, Italy, Portugal and Spain) and the Core, respectively. Large contractionary shocks in the Periphery trigger sovereign default. We find sizable spillover effects of default from Periphery to the Core through a drop in the volume of credit extended by the banking sector.

Banks, Sovereign Debt and the International Transmission of Business Cycles

This paper studies the international propagation of sovereign debt default. We posit a two-country economy where capital constrained banks grant loans to firms and invest in bonds issued by the domestic and the foreign government. The model economy is calibrated to data from Europe, with the two countries representing the Periphery (Greece, Italy, Portugal and Spain) and the Core, respectively. Large contractionary shocks in the Periphery trigger sovereign default. We find sizable spillover effects of default from Periphery to the Core through a drop in the volume of credit extended by the banking sector.

Statement of retraction

This article refers to:Financial integration and international transmission of business cycles: evidence from dynamic correlations

Trade wedges, inventories, and international business cycles

The large, persistent fluctuations in international trade that cannot be explained in standard models by changes in expenditures and relative prices are often attributed to trade wedges. We show that these trade wedges can reflect the decisions of importers to change their inventory holdings. We find that a two-country model of international business cycles with an inventory management decision can generate trade flows and wedges consistent with the data. Moreover, matching trade flows alters the international transmission of business cycles. Specifically, real net exports become countercyclical and consumption is less correlated across countries than in standard models. We also show that ignoring inventories as a source of trade wedges substantially overstates the role of trade wedges in business cycle fluctuations.

Trade Wedges, Inventories, and International Business Cycles

The large, persistent fluctuations in international trade that cannot be explained in standard models by changes in expenditures and relative prices are often attributed to trade wedges. We show that these trade wedges can reflect the decisions of importers to change their inventory holdings. We find that a two-country model of international business cycles with an inventory management decision can generate trade flows and wedges consistent with the data. Moreover, matching trade flows alters the international transmission of business cycles. Specifically, real net exports become countercyclical and consumption is less correlated across countries than in standard models. We also show that ignoring inventories as a source of trade wedges substantially overstates the role of trade wedges in business cycle fluctuations.