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What has caused global business cycle decoupling: Smaller shocks or reduced sensitivity?

Author

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  • Berger, Tino
  • Richter, Julia
Abstract
According to a growing body of empirical literature, global shocks have become less important for business cycles in industrialized countries and emerging market economies since the mid-1980s. In this paper, we analyze the question of what might have caused a decoupling from the global business cycle: the smaller size of the global shocks or a reduced sensitivity of national business cycles to these shocks? To this end, we employ a large scale hierarchical dynamic factor model that decomposes the growth rates of GDP, consumption, and investment for 106 countries over 1961-2014 into a global, a group-, and a country-specific factor, as well as an idiosyncratic component. The factor loadings and conditional variances are allowed to vary over time according to random walk processes. Instead of assuming that the parameters change, we test for time variation using a Bayesian stochastic model specification search. Our results confirm a reduction in the importance of the global business cycle for the vast majority of our countries. However, the sensitivity of most countries to global or group-specific shocks as measured by the factor loadings has not changed over time. Instead, the magnitude of the global shocks relative to group-specific and country-specific shocks has decreased, resulting in a lower relevance of global shocks for national cycles.

Suggested Citation

  • Berger, Tino & Richter, Julia, 2017. "What has caused global business cycle decoupling: Smaller shocks or reduced sensitivity?," University of Göttingen Working Papers in Economics 300, University of Goettingen, Department of Economics.
    • Handle: RePEc:zbw:cegedp:300
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    References listed on IDEAS

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    Cited by:

    1. Potjagailo, Galina & Wolters, Maik H., 2023. "Global financial cycles since 1880," Journal of International Money and Finance, Elsevier, vol. 131(C).

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    More about this item

    Keywords

    global business cycle; dynamic factor model; time-varying parameter; stochastic volatility; model selection;
    All these keywords.

    JEL classification:

    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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