Business Cycle Comovement in the G-7: Common Shocks or Common Transmission Mechanisms?

Posted: 27 Mar 2007 Last revised: 9 Jun 2013

See all articles by Claudio Morana

Claudio Morana

Università di Milano Bicocca; Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS); Università degli Studi di Milano-Bicocca - Center for European Studies (CefES); Center for Economic Research on Pensions and Welfare Policies (CeRP); Rimini Center for Economic Analysis - Europe ETS; Rimini Center for Economic Analysis - HQ

Fabio C. Bagliano

University of Turin - Department of Economics and Statistics; Center for Research on Pensions and Welfare Policies (CeRP); University of Turin - Collegio Carlo Alberto

Date Written: May 11, 2010

Abstract

What are the sources of macroeconomic comovement among G-7 countries? Two main candidate explanations may be singled out: common shocks and common transmission mechanisms. In the paper it is shown that they are complementary, rather than alternative, explanations. By means of a large-scale factor vector autoregressive (FVAR) model, allowing for full economic and statistical identification of all global and idiosyncratic shocks, it is found that both common disturbances and common transmission mechanisms of global and country-specific shocks account for business cycle comovement in the G-7 countries. Moreover, spillover effects of foreign idiosyncratic disturbances seem to be a less important factor than the common transmission of global or domestic shocks in the determination of international macroeconomic comovements.

Keywords: business cycle comovement, factor vector autoregressive model, transmission mechanisms.

JEL Classification: C32, E32

Suggested Citation

Morana, Claudio and Bagliano, Fabio C., Business Cycle Comovement in the G-7: Common Shocks or Common Transmission Mechanisms? (May 11, 2010). Applied Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=974433

Claudio Morana

Università di Milano Bicocca ( email )

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Fabio C. Bagliano (Contact Author)

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