The World is Not Enough! Small Open Economies and Regional Dependence

28 Pages Posted: 19 Jan 2016

See all articles by Knut Are Aastveit

Knut Are Aastveit

Norges Bank

Hilde C. Bjørnland

Norwegian School of Management (BI); Norges Bank

Leif Anders Thorsrud

Norges Bank; BI Norwegian Business School

Date Written: January 2016

Abstract

In this paper, we explicitly introduce regional factors into a global dynamic factor model. We combine new open economy factor models (emphasizing global shocks) with the recent findings of regional importance in the business cycle synchronization literature. The analysis is applied to a large panel of domestic data for four small open economies. We find that global and regional shocks explain roughly 30 and 20 percent, respectively, of the business cycle variation in all countries. While global shocks have most impact on trade variables, regional shocks explain a relatively large share of the variation in cost variables.

Keywords: Business cycle synchronization, factor model, globalization, international transmission, regionalism

JEL Classification: C32, E32, F41

Suggested Citation

Aastveit, Knut Are and Bjørnland, Hilde C. and Thorsrud, Leif Anders, The World is Not Enough! Small Open Economies and Regional Dependence (January 2016). The Scandinavian Journal of Economics, Vol. 118, Issue 1, pp. 168-195, 2016, Available at SSRN: https://ssrn.com/abstract=2717196 or http://dx.doi.org/10.1111/sjoe.12126

Knut Are Aastveit (Contact Author)

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

Hilde C. Bjørnland

Norwegian School of Management (BI) ( email )

P.O. Box 580
N-1302 Sandvika
Norway

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

Leif Anders Thorsrud

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

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