Understanding the Evolution of World Business Cycles

Transcription

1 Undersanding he Evoluion o World Business Cycles M. Ayhan Kose IMF Chrisopher Orok Universiy o Virginia Charles H. Whieman Universiy o Iowa 1

2 Gloalizaion: Increasing Trade Links and more inegraed Financial Markes Has gloalizaion changed he naure o World Business Cycles? he spillover rom America s downurn o he res o he has een more powerul han in he pas. As he economy has ecome more inegraed, a downurn in one economy spreads aser o anoher.. (The Economis, Augus 25, 2001) Mr. Ruin (ormer Treasury Secreary Roer Ruin) o Ciigroup agrees ha economic inerdependence migh have greased he spread o he American downurn (NY Times, Augus 20, 2001). 2

3 Evidence o Gloalizaion Financial Linkages US holding o oreign socks has grown rom 24.1% o 45% since 1985 (Heahcoe and Perri, 2001) Trade Linkages changes in he volume o merchandise rade changes in GDP changes in ari raes changes in he numer o regional rade agreemens 3

4 Tale 1 Growh o World Trade ( ) World Real GDP World Expor Volume Average Tari Rae on Manuacured Goods Numer o Regional Trade Agreemens Noiied o he GATT/WTO 14% 11% 6.9% 5% 3%

5 Why Do We Need o Undersand Changes in World Business Cycles? I here are changes in and naional usiness cycle heoreical models o usiness cycles should e ale o explain hese changes The changes can e used o improve exising usiness cycle models (momens and shocks) These changes migh have imporan policy implicaions (i.e. policy coordinaion issues) 5

6 Empirical Evidence on he Changing Naure o Business Cycles 3.00 Volailiy (Sandard Deviaion o Oupu Growh) G-7 Average Volailiy Oupu Consumpion Invesmen 63:1-72:4 73:1-86:2 86:3-00:4 6

7 0.40 Comovemen (Cross-Counry Oupu Correlaions) G-7 Average Correlaion Oupu Consumpion Invesmen 63:1-72:4 73:1-86:2 86:3-00:4 7

8 Some addiional acs Average oupu volailiy has gone down. Average invesmen volailiy has gone down. Average consumpion volailiy has no changed much. Cross-counry oupu, consumpion, and invesmen correlaions were lower in he hird period han ha in he second period. We oserve only marginal increases in average correlaions moving rom he irs period o he hird period. 8

9 Our Conriuion: To undersand he evoluion o usiness cycles over ime y esimaing common dynamic componens in main macroeconomic aggregaes Are here changes in he characerisics o usiness cycles over ime? Has gloalizaion changed he naure o usiness cycles? How do changes in he usiness cycles aec dieren macroeconomic aggregaes? Wha are he sources or hese changes? 9

10 Mehodology: A Dynamic Facor Model Unoservale Index Model Index o Common Economic Aciviy A ew acors drive many ime series (Sargen and Sims 1977) Generalizaion o Variance-Componens Model Componens accoun or specral densiy marix o oservale variales, no jus he conemporaneous covariance marix 10

11 Single Facor Model n oservale variales, denoed y i, i = 1,...,n, a single common acor, y 0, accouns or all comovemen among he n variales. y i = a i + i y 0 + ε i Eε i ε j-s = 0 or i j. The idiosyncraic errors ε i, are modeled as p i - order auoregressions: ε = φ ε + φ ε φ ε + u i, i,1 i, 1 i,2 i, 2 i,p i, p i, i i Eu i u j-s = σ i 2 σ i 2 u i ~N(0, ). or i = j, s=0, 0 oherwise. 11

12 12 Japan,I, Can Counry Japan,I Japan,I Japan Japan,C, Can Counry Japan,C Japan,C Japan Japan,O, Can Counry Japan,O Japan,O Japan US,I, US Counry US,I US,I US US,C, US Counry US,C US,C US US,O, US Counry US,O US,O US I C O I C O + ε + = + ε + = + ε + = + ε + = + ε + = + ε + = M

13 Conriuions Sysemaic examinaion o he hree dieren ime periods 1960s: Breon Woods period 1970s-mid 1980 s: Common Shock Period Mid 1980 s on- Gloalizaion Period Muliple acors: World and Counry Speciic Facors (undersanding gloal and naional usiness cycles) The impac o gloalizaion on dieren macroeconomic variales (Oupu, Consumpion, and Invesmen) Esalishing a link eween he changes in usiness cycles and changes in exogenous variales ha are hough o e he source o economic lucuaions 13

14 Preliminary Resuls World Facor (Y, C, I) (73:1-00:4) Q1 1974Q1 1975Q1 1976Q1 1977Q1 1978Q1 1979Q1 1980Q1 1981Q1 1982Q1 1983Q1 1984Q1 1985Q1 1986Q1 1987Q1 1988Q1 1989Q1 1990Q1 1991Q1 1992Q1 1993Q1 1994Q1 1995Q1 1996Q1 1997Q1 1998Q1 1999Q1 2000Q1 Years Facor

15 Preliminary Resuls Variance o Oupu Explained y he World Facor (%) Fracion o Variance (%) Germany Japan US Canada France Ialy UK 63:1-72:4 73:1-86:2 86:3-00:4 15

16 Preliminary Resuls Average Variance Explained y he World Facor (%) Fracion o Variance (%) Oupu Consumpion Invesmen 63:1-72:4 73:1-86:2 86:3-00:4 16

17 Preliminary Resuls Variance o Invesmen Explained y he World Facor (%) Fracion o Variance (%) Germany Japan US Canada France Ialy UK 63:1-72:4 73:1-86:2 86:3-00:4 17

18 Preliminary Resuls Average Variance Explained y he Counry Facor (%) Fracion o Variance (%) Oupu Consumpion Invesmen 63:1-72:4 73:1-86:2 86:3-00:4 18

19 Addiional Issues Complee he daa series and re-esimae he models wih he complee series (exension o a se o indusrialized OECD counries) Ideniy he sources o hese changes. Prime candidaes include changes in moneary or iscal policy, changes in he produciviy shocks, oil prices and he erm-orade. Compare he early gloalizaion period (lae 19 h cenury) wih he lae gloalizaion period (lae 20 h cenury). We have annual daa Y, C, I, M, G covering 19 hese periods.