Comovements In The Real Activity Of Developed And Emerging Economies: A Test Of Global Versus Specific International Factors

Although globalization has shaped the world economy in recent decades, emerging economies have experienced impressive growth compared to developed economies, suggesting specific comovements within developed and emerging business cycles. Using observed developed and emerging real economy activity variables, we investigate whether the latter assertion can be supported by observed data. Based on a two-level factor model, we assume these activity variables can be decomposed into global components, emerging or developed common components, and idiosyncratic national shocks. We propose a statistical test for the null hypothesis of a one-level specification, where it is irrelevant to distinguish between emerging and developed latent factors against the two-level alternative. This paper provides a theoretical justification and Monte Carlo simulations that document the testing procedure. An application of the test to various datasets of developed and emerging countries leads to strong statistical evidence of specific comovements within these two groups.