In the modern environment of radically enhanced global macroeconomic and financial link-ages, isolated country analysis seems highly insufficient for informed assessment of the state of real activity, and hence for informed decision making. In this paper, we propose and implement a framework for characterizing and monitoring the global business cycle. The framework is informed by economic theory and structured so as to help inform subsequent economic theory. We apply it to the G-7 countries, and in so doing we extend the empirical research program on the global business cycle along several dimensions.
First, we consider the roles played by a large set of macroeconomic indicators when we construct our country and global cycles. The country and global factors that we estimate provide a better characterization of business cycles as they encompass a wide array of activity measures, in the tradition of Burns and Mitchell (1946) and much subsequent research. This contrasts with most of the literature on global business cycles, which uses only quarterly national income and product account data.
Second, using our comprehensive set of indicators, we provide a systematic characterization of global and national business cycles. In particular, we analyze various statistical properties of cycles, and we relate certain cyclical episodes to the movements in country and global macroeconomic variables. We also study the interaction of activity across countries and with the global cycle.
Third, and related, we use our rich set of indicators to explore the evolution of the global business cycle. We emphasize, among other things, whether and how the degree of cross-country business cycle synchronization has evolved over time in response to the forces of globalization. Against this background, we devote special attention to the recent recession.
We proceed as follows. In Section 2 we review several literatures that bear on our concerns. We first provide a summary of various empirical approaches used to model the global business cycle. Then, considering that our measures of global and national business cycles help us analyze the evolution of the synchronization of business cycles, we also review the literature on linkages between globalization and synchronization of business cycles. The main message is that, although various approaches have been employed, it has been a challenge to construct practical and satisfactory tools to monitor global business cycles. Our methodology allows us to present a coherent analysis of interactions between the global business cycle and country-specific cycles, as it employs a well-defined hierarchical structure.
Contents
1 Introduction
2 An Interpretive Literature Review
2.1 Empirical Modeling of the Global Business Cycle
2.2 Globalization and Business Cycle Synchronization
- 2.2.1 Theory
2.2.2 Empirics
3 A G-7 Real Activity Indicator Dataset
4 Single-Country Real Activity Modeling
4.1 A Single-Country Dynamic Factor Model
4.2 Single-Country Empirics and Extraction of Country Real Activity
- 4.2.1 Country Factors
4.2.2 Evolution of Country Factors
4.2.3 Synchronization of Country Factors
5 Multi-Country Analysis
5.1 A Hierarchical Multi-Country Model
5.2 Multi-Country Empirics and Extraction of G-7 Real Activity
- 5.2.1 Estimation of the G-7 Factor
5.2.2 Evolution of the G-7 Factor and the Idiosyncratic Components
6 Concluding Remarks
A Details of the State Space Model for Country Factor Extraction
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Globalization, the Business Cycle, and Macroeconomic Monitoring
