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Understanding OECD Output Correlations

Author

Listed:
  • 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.

Suggested Citation

  • Glenn Otto & Graham Voss & Luke Willard, 2001. "Understanding OECD Output Correlations," RBA Research Discussion Papers rdp2001-05, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp2001-05
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    File URL: http://www.rba.gov.au/publications/rdp/2001/pdf/rdp2001-05.pdf
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    References listed on IDEAS

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    1. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November.
    2. Gregory, Allan W & Head, Allen C & Raynauld, Jacques, 1997. "Measuring World Business Cycles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(3), pages 677-701, August.
    3. 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.
    4. Shleifer, Andrei, 1986. "Implementation Cycles," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1163-1190, December.
    5. Buiter, Willem H., 2000. "Optimal Currency Areas: Why Does The Exchange Rate Regime Matter?," CEPR Discussion Papers 2366, C.E.P.R. Discussion Papers.
    6. 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 621-632, November.
    7. Gagnon, Joseph E., 1993. "Exchange rate variability and the level of international trade," Journal of International Economics, Elsevier, vol. 34(3-4), pages 269-287, May.
    8. 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.
    9. 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.
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    More about this item

    Keywords

    business cycle correlations; international economic integration;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F15 - International Economics - - Trade - - - Economic Integration
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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