Has the G7 business cycle become more synchronized ?
This paper adopts Friedmanâ€™s Plucking Markov Switching Model to decompose G7 real GDPs into common permanent components, common transitory components, infrequent Markov Switching negative shock and domestic idiosyncratic components. The findings show that the common components explain a 53.1% average volatility of G7 GDPs from 1960 to 2002. Despite the moderated volatility of G7 economies, the G7 business cycle (except Japan) has become more synchronized in its fluctuations. In addition, from the dynamic factor model with Markov switching, there appears to have been a common permanent synchronized fluctuation in the Euro-zone countries after 1984. The probability that the common transitory component is contracting, accords quite well with U.S recessionary dates.
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