Globalization and Business Cycle Transmission

The paper uses long-run GDP data for developed countries drawn from Maddison (2003) to generate deviation cycles for the period from 1870 to 2004. The cyclical deviates are examined for their bilateral cross-correlation values in three separatec periods, those of the first globalization wave (1870 to 1914), the period of the “bloc economy” (1915 to 1959) and for the period of the second globalization (1960-2004). Cluster analysis is applied and the McNemar test is used to test for the relative coherence of alternative groupings of countries in the three periods. The bloc economy period emerges as one that features some well-defined sub-global clusters, where the second globalization period does not, the first globalization period lying between the two in this respect. The second globalization period shows a generally higher level of cross correlations and a lower variance than the other two periods. The features uncovered suggest that the second globalization period is indeed one that comprises a more inclusive world economy than ever before.