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Can emerging economies decouple from the US business cycle?

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  • Eleonora Cutrini

    (University of Macerata)

  • Giorgio Galeazzi

    (University of Macerata)

Abstract

In this paper we focus on the decoupling hypothesis between emerging countries and United States, as the more influent economy for the business cycle movements of advanced countries. Despite the theoretical and empirical analyses to date, it seems fair to say that there is no consensus on the main determinants of differences or similarities in the business fluctuations among countries or groups. We contribute to the debate using quarterly seasonally adjusted data over the period 1995–2010 and find that after a period of substantial increase in business cycles synchronization, different groups of emerging economies decoupled from the United States before the outbreak of the financial crisis (between 2003 and 2007). During the peak of the crisis the change in business cycle was so huge to determine the “decoupling reversal” (or recoupling) that results from our analysis. Furthermore, we investigate the conditions under which emerging economies can actually avoid being involved into the United States recession or at least minimize the consequences. Our results suggest as key variables domestic demand, intraregional linkages and quality of institutions. The higher the level of these variables, the most likely is to reduce their dependence from the US business cycle.

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Bibliographic Info

Paper provided by Macerata University, Department of Studies on Economic Development (DiSSE) in its series Working Papers with number 41-2012.

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Date of creation: May 2012
Date of revision: May 2012
Handle: RePEc:mcr:wpaper:wpaper00041

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Keywords: emerging economies; panel probit; synchronicity; decoupling;

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  1. Hui Tong & Shang-Jin Wei, 2009. "The Composition Matters: Capital Inflows and Liquidity Crunch during a Global Economic Crisis," IMF Working Papers 09/164, International Monetary Fund.
  2. M. Ayhan Kose & Christopher Otrok & Eswar S. Prasad, 2008. "Global Business Cycles: Convergence or Decoupling?," NBER Working Papers 14292, National Bureau of Economic Research, Inc.
  3. Athukorala, Prema-chandra & Kohpaiboon, Archanun, 2009. "Intra-Regional Trade in East Asia: The Decoupling Fallacy, Crisis, and Policy Challenges," ADBI Working Papers 177, Asian Development Bank Institute.
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  7. Michael P. Dooley & Michael M. Hutchison, 2009. "Transmission of the U.S. Subprime Crisis to Emerging Markets: Evidence on the Decoupling-Recoupling Hypothesis," NBER Working Papers 15120, National Bureau of Economic Research, Inc.
  8. Jarko Fidrmuc & Iikka Korhonen, 2009. "The Impact of the Global Financial Crisis on Business Cycles in Asian Emerging Economies," CESifo Working Paper Series 2710, CESifo Group Munich.
  9. Brian M. Doyle & Jon Faust, 2005. "Breaks in the Variability and Comovement of G-7 Economic Growth," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 721-740, November.
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  11. Pula, Gabor & Peltonen, Tuomas A., 2009. "Has emerging Asia decoupled? An analysis of production and trade linkages using the Asian international input-output table," Working Paper Series 0993, European Central Bank.
  12. Nathaniel Frank & Heiko Hesse, 2009. "Financial Spillovers to Emerging Markets during the Global Financial Crisis," IMF Working Papers 09/104, International Monetary Fund.
  13. Dong He & Wei Liao, 2011. "Asian Business Cycle Synchronisation," Working Papers 062011, Hong Kong Institute for Monetary Research.
  14. Subir Lall & Roberto Cardarelli & Selim Elekdag, 2009. "Financial Stress, Downturns, and Recoveries," IMF Working Papers 09/100, International Monetary Fund.
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