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International Economic Review

GLOBAL BUSINESS CYCLES: CONVERGENCE OR DECOUPLING?*

M. Ayhan Kose,

International Monetary Fund; University of Missouri, Columbia, and Federal Reserve Bank of St. Louis, U.S.A.; Cornell University, U.S.A.

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Christopher Otrok,

International Monetary Fund; University of Missouri, Columbia, and Federal Reserve Bank of St. Louis, U.S.A.; Cornell University, U.S.A.

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Eswar Prasad,

International Monetary Fund; University of Missouri, Columbia, and Federal Reserve Bank of St. Louis, U.S.A.; Cornell University, U.S.A.

Earlier versions of this article were presented at the Brookings Institution, Bundesbank Annual Research Conference, Cornell University, Federal Reserve Bank of New York, Johns Hopkins University, NBER Summer Institute, University of Wisconsin, and the World Congress of the International Economic Association. We would like to thank Mark Aguiar, Stijn Claessens, Selim Elekdag, Charles Engel, Linda Goldberg, Massimiliano Marcellino, Fabrizio Perri, Mark Watson, and three anonymous referees for useful comments. Raju Huidrom and Yusuke Tateno provided excellent research assistance. The views expressed in this paper are those of the authors and do not necessarily represent those of the IMF or IMF policy. Please address correspondence to: Christopher Otrok, Department of Economics, University of Missouri, 909 University Avenue, 118 Professional Building, Columbia, MO 65211-6040. Phone: (434) 924-3692. E-mail: otrokc@missouri.edu.

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First published: 21 May 2012
https://doi.org/10.1111/j.1468-2354.2012.00690.x
Citations: 188
†

Manuscript received August 2008; revised November 2010.

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Abstract

We analyze the evolution of the degree of global cyclical interdependence over the period 1960–2008. Using a dynamic factor model, we decompose macroeconomic fluctuations in output, consumption, and investment into a global factor, factors specific to country groups, and country-specific factors. We find that during 1985–2008, there is some convergence of business cycle fluctuations among industrial economies and among emerging market economies. Surprisingly, there is a concomitant decline in the relative importance of the global factor. We conclude that there is evidence of business cycle convergence within each of these two groups of countries but divergence (or decoupling) between them.

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