international business cycles

December 5, 2011

We study how credit supply shocks in the US, the euro area and Japan are transmitted to other economies. We use the recently-developed GVAR approach to model financial variables jointly with macroeconomic variables in 33 countries for the period 1983-2009. We experiment with inter-country links that distinguish bilateral trade, portfolio investment, foreign direct investment and banking exposures, as well as asset-side vs. liability-side financial channels. Capturing both bilateral trade and inward foreign direct investment or outward banking claim exposures in a GVAR fits the data better than using trade weights only. We use sign restrictions on the short-run impulse responses to financial shocks that have the effect of reducing credit supply to the private sector. We find that negative US credit supply shocks have stronger negative effects on domestic and foreign GDP, compared to credit supply shocks from the euro area and Japan. Domestic and foreign credit and equity markets respond clearly to the credit supply shocks. Exchange rate responses are consistent with a "flight to quality" to the US dollar. The UK, another international financial centre, is also responsive to the shocks. These results are robust to the exclusion of the 2007-09 crisis episode from the sample.

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August 15, 2010

Understanding the joint dynamics of international prices and quantities remains a central issue in international business cycles. International relative prices appreciate when domestic consumption and output increase more than their foreign counterparts. In addition, both trade flows and trade prices display sizable volatility. This paper incorporates Hicks-neutral and investment-specific technology shocks into a standard two-country general equilibrium model with variable capacity utilization and weak wealth effects on labor supply. Investment-specific technology shocks introduce a source of fluctuations in absorption similar to taste shocks, thus reconciling theory and data. The paper also presents implications for the transmission mechanism of technology shocks across countries and for the Barro and King (1984) critique of investment shocks.

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October 1, 2004

This Paper examines the changing relationships between the G7 countries through VAR models for the quarterly growth rates, estimated both over sub-periods and using a rolling data window. Six trivariate models are estimated, all of which include the US and a European (E15) aggregate. In relative terms, the conditional volatility of E15 growth has declined more since 1980 than the well-documented decline for the US. The propagation of shocks has also changed, with the volatility and propagation effects separated by applying shocks of pre-1980 magnitude to VARs estimated over various periods. Rolling estimation reveals that E15 has a steadily increasing impact on the US economy over time, while the effects of the US on Europe have been largest during the 1970s and the late 1990s.

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