What Has Caused Global Business Cycle Decoupling: Smaller Shocks or Reduced Sensitivity?

CEGE - Center for European, Governance and Economic Development Research, Discussion Papers, No. 300, January 2017

41 Pages Posted: 16 Jan 2017

See all articles by Tino Berger

Tino Berger

University of Goettingen (Göttingen) - Department of Economics

Julia Richter

University of Goettingen (Göttingen)

Date Written: January 13, 2017

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.

Keywords: global business cycle, dynamic factor model, time-varying parameter, stochastic volatility, model selection

JEL Classification: F44, C52, C32

Suggested Citation

Berger, Tino and Richter, Julia, What Has Caused Global Business Cycle Decoupling: Smaller Shocks or Reduced Sensitivity? (January 13, 2017). CEGE - Center for European, Governance and Economic Development Research, Discussion Papers, No. 300, January 2017, Available at SSRN: https://ssrn.com/abstract=2898741 or http://dx.doi.org/10.2139/ssrn.2898741

Tino Berger (Contact Author)

University of Goettingen (Göttingen) - Department of Economics ( email )

Platz der Goettinger Sieben 3
Goettingen, 37073
Germany

Julia Richter

University of Goettingen (Göttingen) ( email )

Wilhelmsplatz 1
Göttingen, 37073
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
74
Abstract Views
573
Rank
611,777
PlumX Metrics