Adding Space to the International Business Cycle
Growth fluctuations exhibit substantial synchronization across countries, which has been viewed as reflecting a global business cycle driven by shocks with worldwide reach, or spillovers resulting from local real and/or financial linkages between c...
| Main Authors: | , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2019
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/756731553172566723/Adding-Space-to-the-International-Business-Cycle http://hdl.handle.net/10986/31434 |
| Summary: | Growth fluctuations exhibit substantial
synchronization across countries, which has been viewed as
reflecting a global business cycle driven by shocks with
worldwide reach, or spillovers resulting from local real
and/or financial linkages between countries. This paper
brings these two perspectives together by analyzing
international growth fluctuations in a setting that allows
for both global shocks and spatial dependence. Using annual
data for 117 countries over 1970-2016, the paper finds that
the cross-country dependence of aggregate growth is the
combined result of global shocks summarized by a latent
common factor and spatial effects accruing through the
growth of nearby countries -- with proximity measured by
bilateral trade linkages or geographic distance. The latent
global factor shows a strong positive correlation with
worldwide TFP growth. Countries' exposure to global
shocks rises with their openness to trade and the degree of
commodity specialization of their economies. Despite its
simplicity, the empirical model fits the data well,
especially for advanced countries. Ignoring the
cross-country dependence of growth, by omitting spatial
effects or common shocks (or both) from the analysis, leads
to a marked deterioration of the empirical model's
in-sample explanatory power and out-of-sample forecasting performance. |
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