Is Economic Activity in the G7 Synchronized? Common Shocks Versus Spillover Effects

45 Pages Posted: 8 Jan 2004

See all articles by Alain Monfort

Alain Monfort

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST); National Bureau of Economic Research (NBER); Maastricht University

Jean-Paul Renne

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne)

Rasmus Rueffer

European Central Bank (ECB)

Giovanni Vitale

European Central Bank (ECB)

Date Written: November 2003

Abstract

This Paper analyses the co-movement in activity, measured by GDP and industrial production, between the G7 countries for the period 1972-2002. For that purpose, a dynamic factor model is estimated using Kalman Filtering techniques. In addition to separating common and country-specific - idiosyncratic - developments of output, we try to identify the causes underlying the observed co-movement: to what extent is it driven by common shocks and to what extent can cross-country/cross-area spill-over effects account for the observed co-movement? We find that the output developments in G7 countries are driven to a substantial extent by common dynamics. A significant part of the co-movement, especially in the first half of the sample, can be explained by developments in the price of oil, an important and easily identifiable common shock. The analysis suggests that, in addition, area-specific common factors play an important role, separating the sample into a North American (US, Canada) and a continental European (France, Germany, Italy) area, with the UK and Japan being somewhat separate from these areas. We find that developments in the North American factor have a strong lagged impact on the continental European factor, while the reverse is not true. Furthermore, the strength of the cross-area spillovers from America to Europe appears to have become stronger over the sample period, suggesting that international linkages have increased in the process of globalization.

Keywords: Dynamic Factor, Kalman Filter, business cycles synchronization

JEL Classification: E30, F00

Suggested Citation

Monfort, Alain and Renne, Jean-Paul and Rueffer, Rasmus and Vitale, Giovanni, Is Economic Activity in the G7 Synchronized? Common Shocks Versus Spillover Effects (November 2003). Available at SSRN: https://ssrn.com/abstract=480668

Alain Monfort (Contact Author)

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) ( email )

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National Bureau of Economic Research (NBER)

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Maastricht University

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Jean-Paul Renne

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

UNIL, Batiment Internef
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Switzerland

Rasmus Rueffer

European Central Bank (ECB) ( email )

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Germany
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+49 69 1344 6353 (Fax)

Giovanni Vitale

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 6000 (Fax)

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