National culture and international business cycle co-movements

We investigate the relationship between national culture and international business cycle co-movements. We first characterize international business cycle co-movements with a dynamic latent factor model that decomposes 101 countries’ real GDP growth rates into world, regional and country-specific factors and estimate the proportion of real GDP growth rate variance explained by the world, regional and country factors for each country. We then regress these proportions on each of the five dimensions of Hofstede’s national culture with a set of control variables. We find that four dimensions (except for power distance) are significantly related to business cycle co-movements, and they have different impacts. In countries with masculinity, uncertainty avoidance and long-term orientation preferences, the global factor explains a larger real GDP growth rate variance. Individualism weakens a country’s business cycle co-movement with the global business cycle. Countries with similar cultural values have similar economic structures and similar exposures to global shocks, which lead to business cycle co-movements. Our results are robust after addressing the issue of endogeneity and subsample analyses.