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Deconstructing the International Business Cycle

Deconstructing the International Business Cycle

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Published by: TradersNarrative on Oct 26, 2010
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Deconstructing The International BusinessCycle: Why Does A U.S. Sneeze Give TheRest Of The World A Cold?
Tamim Bayoumi and Trung Bui
WP/10/239
 
 
© 2010 International Monetary Fund WP/10/

 
IMF Working Paper
Strategy, Policy, and Review DepartmentDeconstructing the International Business Cycle:Why does a U.S. sneeze give the rest of the world a cold?
1
 
Prepared by Tamim Bayoumi and Trung Bui
 
2010
Abstract
The 2008 crisis underscored the interconnectedness of the international business cycle, with U.S.shocks leading to the largest global slowdown since the 1930s. We estimate spillover effectsacross major advanced country regions in a structural VAR (SVAR) using pre-crisis data. Our newmethod freely estimates the contemporaneous correlation matrix for underlying shocks in the VAR and (uniquely, to our knowledge) the associated uncertainty. Our results suggest that theinternational business cycle is largely driven by U.S. financial shocks with a significant impactfrom global shocks, mainly reflecting commodity prices. Other advanced economic regions play amuch smaller and regional role in growth spillovers. Our findings are consistent with the emergingevidence on the current crisis
 JEL Classification Numbers:
C32, E32, F20, F43
 Keywords:
spillovers; international business cycles; identification; structural VAR;
 Author’s E-Mail Address:tbayoumi@imf.org,tbui@imf.org.
This Working Paper should not be reported as representing the views of the IMF.
The views expressed in this Working Paper are those of the author(s) and do not necessarilyrepresent those of the IMF or IMF policy. Working Papers describe research in progress by theauthor(s) and are published to elicit comments and to further debate.
1
The authors gratefully acknowledge helpful comments by Sam Ouliaris, David Romer, Kenneth West,Francis Vitek, Martin Evans, Sandra Eickmeier, and participants at the IMF RES and SPR department seminars,the Georgetown University macroeconomics seminar, and the EABCN conference.
 
2
 
Contents PageI. Introduction ............................................................................................................................3
 
II. Identification of Structural VARs through Heteroskedasticity .............................................4
 
III. VAR Specification and Parameter Stability Tests ...............................................................7
 
IV. International Spillovers: Directions and Sizes .....................................................................9
 
V. Sources of Spillovers ..........................................................................................................12
 
VI. Explaining the Great Recession .........................................................................................13
 
VII. Conclusions ......................................................................................................................14
 
Tables1: Estimated Standard Errors of Quarter-to-Quarter Output Growth by Decade ....................20
 
2. Test Results for Structural Breaks in the VAR Coefficients ...............................................20
 
3. Test Results for Structural Change in the A Matrix ............................................................21
 
4. Average Contemporaneous A-Inverse Matrix–1980:Q1–2007:Q4 .....................................21
 
5. Changes in Standard Errors of Structural Shocks ................................................................22
 
6. Variance Decomposition of Real GDP at 8th–Quarter ........................................................22
 
7. Variance Decompositions of Real GDP at 8th–Quarter (extended) ....................................23
 
Figures1. Identification through Heteroskedasticity Example .............................................................15
 
2. Quarter-to-Quarter Real GDP Growth (1970–2007) ...........................................................15
 
3a. (Accumulated) Impulse Responses of Real GDP to 1-s.d. Structural Shock .....................16
 
3b. (Accumulated) Impulse Responses of Real GDP to 1-s.d. Structural Shock ....................16
 
4. Decomposition of Spillover Effects .....................................................................................17
 
5. Structural GDP Growth Shocks ...........................................................................................19
 
AppendixesAppendix ..................................................................................................................................24
 
ReferencesReferences ................................................................................................................................27
 

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