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The Global Business Cycle: Measurement and Transmission

Zhen Huo, Andrei Levchenko and Nitya Pandalai-Nayar

No 25978, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper uses sector-level data for 30 countries and up to 28 years to provide a quantitative account of the sources of international GDP comovement. We propose an accounting framework to decompose comovement into the components due to correlated shocks, and to the cross-country transmission of shocks. We apply this decomposition in a multi-country multi-sector DSGE model. We provide an analytical solution to the global influence matrix that characterizes every country's general equilibrium GDP elasticities with respect to shocks anywhere in the world. We then provide novel estimates of country-sector-level technology and non-technology shocks to assess their correlation and quantify their contribution to comovement. TFP shocks are virtually uncorrelated across countries, whereas non-technology shocks are positively correlated. These positively correlated shocks account for two thirds of the observed GDP comovement, with international transmission through trade accounting for the remaining one third. However, trade opening does not necessarily increase GDP correlations relative to autarky, because the contribution of trade openness to comovement depends on whether sectors with more or less correlated shocks grow in influence as countries increase input linkages. Finally, while the dynamic model features rich intertemporal propagation, quantitatively these components contribute little to GDP comovement as impact effects dominate.

JEL-codes: F41 F44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-opm
Date: 2019-06
Note: IFM ITI
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Working Paper: The Global Business Cycle: Measurement and Transmission (2019) Downloads
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