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The global economic landscape has shifted dramatically since the mid-1980s. First, there has been a rapid increase in trade and financial linkages across countries. Second, emerging market economies have increasingly become major players and they now account for about a quarter of world output and a major share of global growth. These developments, along with the imminent U.S. recession and concerns about its international spillover effects, have generated a vigorous debate about changes in the patterns of international business cycle comovement. On the one hand, the conventional wisdom suggests that the forces of globalization in recent decades have increased cross-border economic interdependence and led to convergence of business cycle fluctuations. Greater openness to trade and financial flows should make economies more sensitive to external shocks and increase comovement in response to global shocks by widening the channels for these shocks to spill over across countries.

On the other hand, in recent years the impressive growth performance of emerging market economies, especially China and India, seems to have been unaffected by growth slowdowns in a number of industrial countries. This has led to questions about the potency of international channels of business cycle transmission. Some observers have even conjectured that these emerging markets have “decoupled” from industrial economies, in the sense that their business cycle dynamics are no longer tightly linked to industrial country business cycles. These two views of cross-border interdependence have very different implications for the evolution of global business cycles.