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Linkages, Transmission, and the Evolution of International Business Cycles

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  • Lance Kent

    ()
    (Department of Economics, College of William and Mary)

Abstract

How do international business cycles change as countries mature and become more deeply linked with their partners? This paper answers that question by establishing new stylized facts on the systematic variation in the transmission of shocks within and between countries along low-frequency trends in income, industrial structure, openness, and trade and financial linkages. Namely, this paper estimates a global "linkage VAR" where the coefficients in the global autoregressive matrix vary as linear functions of these low-frequency trends. This regression finds that when a country imports more investment or intermediate goods from a given partner country, the response of its output to shocks from its partner is amplified. When a country holds more FDI assets in a given partner country, the response of its output to shocks from its partner is dampened. The paper then poses an international real business cycle model and derives a novel application of the perturbation method to compare the changes in propagation within this model to those implied by the linkage VAR. The model performs reasonably well for some of the principal components of the distribution of observed evolution in bilateral linkages but not others. The novel methodology of this paper achieves both the estimation of new stylized facts as well as a novel way to assess structural models in light of them.

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Bibliographic Info

Paper provided by Department of Economics, College of William and Mary in its series Working Papers with number 149.

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Length: 35 pages
Date of creation: 15 Mar 2014
Date of revision:
Handle: RePEc:cwm:wpaper:149

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Keywords: Business Cycles; Global Panel VAR; Financial Integration; Stylized Facts.;

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