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Is Economic Activity in the G7 Synchronized? Common Shocks versus Spillover Effects

  • Monfort, Alain
  • Renne, Jean-Paul
  • Rüffer, Rasmus
  • Vitale, Giovanni

This Paper analyses the co-movement in activity, measured by GDP and industrial production, between the G7 countries for the period 1972-2002. For that purpose, a dynamic factor model is estimated using Kalman Filtering techniques. In addition to separating common and country-specific - idiosyncratic - developments of output, we try to identify the causes underlying the observed co-movement: to what extent is it driven by common shocks and to what extent can cross-country/cross-area spill-over effects account for the observed co-movement? We find that the output developments in G7 countries are driven to a substantial extent by common dynamics. A significant part of the co-movement, especially in the first half of the sample, can be explained by developments in the price of oil, an important and easily identifiable common shock. The analysis suggests that, in addition, area-specific common factors play an important role, separating the sample into a North American (US, Canada) and a continental European (France, Germany, Italy) area, with the UK and Japan being somewhat separate from these areas. We find that developments in the North American factor have a strong lagged impact on the continental European factor, while the reverse is not true. Furthermore, the strength of the cross-area spillovers from America to Europe appears to have become stronger over the sample period, suggesting that international linkages have increased in the process of globalization.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4119.

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Date of creation: Nov 2003
Date of revision:
Handle: RePEc:cpr:ceprdp:4119
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  1. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 1999. "The Generalized Dynamic Factor Model: Identification and Estimation," CEPR Discussion Papers 2338, C.E.P.R. Discussion Papers.
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  6. Gregory, Allan W. & Head, Allen C., 1999. "Common and country-specific fluctuations in productivity, investment, and the current account," Journal of Monetary Economics, Elsevier, vol. 44(3), pages 423-451, December.
  7. Forni, Mario & Lippi, Marco, 2000. "The Generalized Dynamic Factor Model: Representation Theory," CEPR Discussion Papers 2509, C.E.P.R. Discussion Papers.
  8. Mario Forni & Lucrezia Reichlin, 2001. "Federal policies and local economies: Europe and the U.S," ULB Institutional Repository 2013/10141, ULB -- Universite Libre de Bruxelles.
  9. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
  10. Brian M. Doyle & Jon Faust, 2002. "An investigation of co-movements among the growth rates of the G-7 countries," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages 427-437.
  11. Chauvet, Marcelle, 1998. "An Econometric Characterization of Business Cycle Dynamics with Factor Structure and Regime Switching," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 969-96, November.
  12. Engle, Robert F & Kozicki, Sharon, 1993. "Testing for Common Features: Reply," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(4), pages 393-95, October.
  13. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 2004. "The generalized dynamic factor model consistency and rates," Journal of Econometrics, Elsevier, vol. 119(2), pages 231-255, April.
  14. repec:oup:restud:v:65:y:1998:i:3:p:453-73 is not listed on IDEAS
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