ADVANCED ECONOMIES AND EMERGING MARKETS: DISSECTING THE DRIVERS OF BUSINESS CYCLE SYNCHRONIZATION
Bank of Greece and University of East Anglia
What are the divers of business cycle synchronization within and between advanced and emerging economies at the sector level? This question is addressed by analysing international co-movements of value added growth in a multi-sector dynamic factor model. The model contains a world factor, region factors, sector factors, country factors, and idiosyncratic components. The model is estimated using Bayesian methods for 9 disaggregated sectors in 5 developed economies (G5) and 19 emerging economies for the 1972-2009 period. The results suggest that, while there exists a common ‘regional business cycle’ in the G5, fluctuations in sectoral value added growth are dominated by country-specific factors in the emerging markets. Despite that, the international factor (the sum of world and sector factors) is more important than the region factor, suggesting that the emerging markets are more synchronized with the G5. A simple regression shows that (i) the world factor would be more important the larger the share of agriculture in output; (ii) in more open economies the sector factor is more important in explaining sectoral VA growth fluctuations; (iii) the region factors is more important the richer and the less volatile the economy. Finally, a comparison of the variance of sectoral value added growth accounted for by each factor from the pre- to the post-globalization period shows convergence of the business cycles within the G5 and EM, respectively. The changes in the contribution of the world, sector and region factor are due to changes in the importance of those factors within sectors. However, for the emerging markets, the fall in the importance of the country factors is dominated by changes in the structural composition of the economies. Therefore, the evolution of the structural composition in the emerging markets could be an important driver for more synchronised business cycles at the regional and international level.
JEL Classification: C38, E32, F44.
Keywords: dynamic factors, disaggregated business cycles, international co-movement, emerging markets.
Acknowledgements: I would like to thank participants at the 21st Annual International Conference on Macroeconomic Analysis and International Finance and three anonymous referees for their useful discussion and feedback. The views expressed in this paper are those of the author and do not necessarily reflect those of the Bank of Greece or the Eurosystem.
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