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Global Business Cycles: Convergence or Decoupling?

M. Ayhan Kose

Development Prospects Group at the World Bank

Christopher Otrok

University of Missouri; Federal Reserve Banks - Federal Reserve Bank of Saint Louis

Eswar S. Prasad

Cornell University - Dyson School of Applied Economics and Management; Cornell University - Department of Economics; Brookings Institution; NBER; Institute for the Study of Labor (IZA)

IZA Working Paper No. 3442

This paper analyzes the evolution of the degree of global cyclical interdependence over the period 1960-2005. We categorize the 106 countries in our sample into three groups - industrial countries, emerging markets, and other developing economies. Using a dynamic factor model, we then decompose macroeconomic fluctuations in key macroeconomic aggregates - output, consumption, and investment - into different factors. These are: (i) a global factor, which picks up fluctuations that are common across all variables and countries (ii) three group-specific factors, which capture fluctuations that are common to all variables and all countries within each group of countries (iii) country factors, which are common across all aggregates in a given country and (iv) idiosyncratic factors specific to each time series. Our main result is that, during the period of globalization (1985-2005), there has been some convergence of business cycle fluctuations among the group of industrial economies and among the group of emerging market economies. Surprisingly, there has been a concomitant decline in the relative importance of the global factor. In other words, there is evidence of business cycle convergence within each of these two groups of countries but divergence (or decoupling) between them.

Number of Pages in PDF File: 53

Keywords: globalization, business cycles, macroeconomic fluctuations, convergence, decoupling

JEL Classification: C11, C32, E32, F42, F41

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Date posted: May 23, 2008  

Suggested Citation

Kose, M. Ayhan and Otrok, Christopher and Prasad, Eswar S., Global Business Cycles: Convergence or Decoupling?. , Vol. , pp. -, . Available at SSRN: http://ssrn.com/abstract=1136247 or http://dx.doi.org/10.1111/j.0042-7092.2007.00700.x

Contact Information

M. Ayhan Kose (Contact Author)
Development Prospects Group at the World Bank ( email )
1818 H Street, NW
Washington, DC 20433
United States
Christopher Mark Otrok
University of Missouri ( email )
118 Professional Building
Columbia, MO 65211
United States
Federal Reserve Banks - Federal Reserve Bank of Saint Louis ( email )
411 Locust St
Saint Louis, MO 63011
United States
Eswar S. Prasad
Cornell University - Dyson School of Applied Economics and Management ( email )
440 Warren Hall
Ithaca, NY 14853
United States
HOME PAGE: http://prasad.aem.cornell.edu
Cornell University - Department of Economics ( email )
414 Uris Hall
Ithaca, NY 14853-7601
United States
Brookings Institution ( email )
1775 Massachusetts Ave, NW
Washington, DC 20036
United States
NBER ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Institute for the Study of Labor (IZA)
P.O. Box 7240
Bonn, D-53072

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