Global vs. Group-Specific Business Cycles: The Importance of Defining the Groups

CEDE Discussion Paper Number 334 – January 2018

24 Pages Posted: 2 Feb 2018

See all articles by Tino Berger

Tino Berger

University of Goettingen (Göttingen) - Department of Economics

Marcus Wortmann

University of Goettingen (Göttingen)

Date Written: January 25, 2018

Abstract

The literature on international business cycles has employed dynamic factor models to disentangle global from group-specific and national factors in countries’ macroeconomic aggregates. Therefore, the countries have simply been classified ex ante as belonging to the same region or the same level of development. This paper estimates a DFM for a sample of 106 countries and three variables (output, consumption, investment) over the period 1960 to 2014, in which the countries are classified according to the outcome of a cluster analysis. By comparing the results with those obtained by the previous grouping approaches, we show substantial deviations in the importance of global and group-specific factors. Remarkably, when the groups are defined properly, the ‘global business cycle’ accounts for only a very small fraction of macroeconomic fluctuations, most evidently in the industrialized world. The group-specific factors, on the other hand, play a much greater role for national business cycles than previously thought – also in the pre-globalization period.

Keywords: international business cycles, globalization, regionalization, dynamic factor models, cluster analysis

JEL Classification: C32, C38, E32, F44

Suggested Citation

Berger, Tino and Wortmann, Marcus, Global vs. Group-Specific Business Cycles: The Importance of Defining the Groups (January 25, 2018). CEDE Discussion Paper Number 334 – January 2018, Available at SSRN: https://ssrn.com/abstract=3110090 or http://dx.doi.org/10.2139/ssrn.3110090

Tino Berger (Contact Author)

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

Platz der Goettinger Sieben 3
Goettingen, 37073
Germany

Marcus Wortmann

University of Goettingen (Göttingen) ( email )

Platz der Gottinger Sieben 3
Gottingen, D-37073
Germany

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