Understanding the Evolution of World Business Cycles

Understanding the Evolution of World Business Cycles

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This paper studies the changes in world business cycles during 1960-2003. We employ a Bayesian dynamic latent factor model to estimate common and country-specific components in the main macroeconomic aggregates of the Group of Seven (G-7) countries. We then quantify the relative importance of these components in explaining comovement in each observable aggregate over three distinct time periods: the Bretton Woods (BW) period (1960-72), the period of common shocks (1972-86), and the globalization period (1986-2003). The results indicate that the common (G-7) factor explains a larger fraction of output, consumption, and investment volatility in the globalization period than in the BW period. These findings suggest that the degree of comovement of business cycles in major macroeconomic aggregates across the G-7 countries has increased during the globalization period.associated with sharp fluctuations in the price of oil and a set of contractionary monetary policies in the major industrial economies that have not characterized the most recent period. ... The importance of the G-7 factor is larger during the common shock period than in the first period. ... For investment, though, the G-7 factor becomes more important over time. ... in the start date of the globalization period. common shock period to the globalization period, the variance explained - - 14.

Title:Understanding the Evolution of World Business Cycles
Author:M. Ayhan Kose, Christopher Otrok, Charles H. Whiteman
Publisher:International Monetary Fund - 2005-11-01


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