Understanding Changes in International Business Cycle Dynamics

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Abstract:

The volatility of economic activity in most G7 economies has moderated over the past 40 years.
Also, despite large increases in trade and openness, G7 business cycles have not become more
synchronized. After documenting these facts, we interpret G7 output data using a structural VAR
that separately identifies common international shocks, the domestic effects of spillovers from
foreign idiosyncratic shocks, and the effects of domestic idiosyncratic shocks. This analysis
suggests that, with the exception of Japan, a significant portion of the widespread reduction in
volatility is associated with a reduction in the magnitude of the common international shocks.
Had the common international shocks in the 1980s and 1990s been as large as they were in the
1960s and 1970s, G7 business cycles would have been substantially more volatile and more
highly synchronized than they actually were. (JEL: C3, E5)

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Last updated on 07/24/2012