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Understanding OECD Output Correlations

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  • Glenn Otto

    (University of New South Wales)

  • Graham Voss

    (Reserve Bank of Australia)

  • Luke Willard

    (Reserve Bank of Australia)

Abstract

This paper develops an empirical model of the cross-country variation in bilateral output growth correlations for 17 OECD countries. Consideration is given to the role played by explicit mechanisms for transmitting shocks between countries, such as trade in goods and financial assets and the coordination of monetary policy between countries. In addition we identify a number of country characteristics and institutions (including measures of legal origin, accounting standards, and the speed of take-up of new technology) that appear to lead countries to respond similarly to economic shocks. Both transmission mechanisms and common country characteristics have a role to play in explaining output correlations. When we use our empirical results to help to explain the strong correlation observed between Australian and US output growth, we conclude that trade between the two countries is not sufficiently important to account for much of the correlation. Nor does the similarity of monetary policies make much of a contribution. Our results instead suggest that it is the similarity of economic characteristics and institutions that explains much of the observed correlation between Australian and US output growth.

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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2001-05.

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Date of creation: Sep 2001
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Handle: RePEc:rba:rbardp:rdp2001-05

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Related research

Keywords: business cycle correlations; international economic integration;

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  1. Shleifer, Andrei, 1986. "Implementation Cycles," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1163-90, December.
  2. Canova, Fabio & Dellas, Harris, 1993. "Trade interdependence and the international business cycle," Journal of International Economics, Elsevier, vol. 34(1-2), pages 23-47, February.
  3. Stockman, Alan C., 1988. "Sectoral and national aggregate disturbances to industrial output in seven European countries," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 387-409.
  4. Cole, Harold L. & Obstfeld, Maurice, 1991. "Commodity trade and international risk sharing : How much do financial markets matter?," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 3-24, August.
  5. Nicolas de Roos & Bill Russell, 1996. "Towards an Understanding of Australia’s Co-movement with Foreign Business Cycles," RBA Research Discussion Papers rdp9607, Reserve Bank of Australia.
  6. Allan W. Gregory & Allen C. Head & Jacques Raynauld, 1994. "Measuring World Business Cycles," Working Papers 902, Queen's University, Department of Economics.
  7. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119, September.
  8. Marianne Baxter & Robert G. King, 1995. "Measuring Business Cycles Approximate Band-Pass Filters for Economic Time Series," NBER Working Papers 5022, National Bureau of Economic Research, Inc.
  9. Joseph E. Gagnon, 1989. "Exchange rate variability and the level of international trade," International Finance Discussion Papers 369, Board of Governors of the Federal Reserve System (U.S.).
  10. Buiter, Willem H, 2000. "Optimal Currency Areas: Why Does The Exchange Rate Regime Matter?," CEPR Discussion Papers 2366, C.E.P.R. Discussion Papers.
  11. Gerlach, H M Stefan, 1988. "World Business Cycles under Fixed and Flexible Exchange Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(4), pages 621-32, November.
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