International Business Cycle Synchronization in Historical Perspective

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The global economy has shown a steady increase in business cycle synchronization over [the past 125 years].

Michael Bordo and Thomas Helbling examine economic data spanning the past 125 years and find that the global economy has shown a steady increase in business cycle synchronization over this period. They further find that the chief cause of this phenomenon in the major industrial countries is the growing importance of global economic shocks.

In International Business Cycle Synchronization in Historical Perspective (NBER Working Paper No. 16103), Bordo and Helbling note that the world-wide economic slump that began in 2008 stands in stark contrast to the view, which had become increasingly widespread in recent decades, that business cycle linkages among industrialized countries have become weaker over time. They argue that long data samples are necessary to address questions about synchronization, because in the short term, business cycle dynamics depend largely on shock dynamics. These shock dynamics can overshadow the effects of long-term trends.

The researchers examine annual data for 16 countries that cover four distinct eras with different international monetary policies: 1880-1913, when much of the world adhered to the classical Gold Standard; the interwar period of 1920-38; the 1948-72 Bretton Woods regime of fixed but adjustable exchange rates; and the modern period, namely 1973 to 2008, which saw managed floating among the major currency areas. They measure the strength of cross-country linkages in macroeconomic fluctuations using correlations among growth rates in real GDP.

Bordo and Helbling find that in recent decades, with increased interdependence through trade and financial linkages, global shocks -- or the rapid transmission of shocks in the center countries -- have become a more important source of business cycle fluctuations. In the post-World War II period, business cycle fluctuations have moderated, reflecting changes in sectoral structure, automatic stabilizers, the use of lender-of-last-resort operations, and the use of discretionary counter-cyclical policies, among other factors. The volatility of idiosyncratic, or country-specific, shocks has decreased more than that of global, or common shocks, suggesting similar changes in sectoral structure and the use of counter-cyclical policies across the industrial countries. This has contributed to the growing relative importance of global shocks, which the study suggests are the main source of business cycle fluctuations across all regimes and models. The researchers note that it is difficult to distinguish between "true" global shocks and what are actually rapidly transmitted shocks in the central countries. They find some evidence that financial factors often seem present during, and may be linked to, periods of large global output shocks.

While data from the past few decades suggest that synchronized downturns are more common than synchronized expansions, the longer historical data sample does not support this. In fact, the average number of countries in recession per year has varied across the four eras without trend. At the same time, the data indicate that synchronization patterns differ considerably across groups of countries, depending on factors such as country size and the region in which a country is located.

-- Matt Nesvisky