Global Macro-Financial Cycles and Spillovers

82 Pages Posted: 2 Mar 2020

See all articles by Jongrim Ha

Jongrim Ha

World Bank

M. Ayhan Kose

World Bank; Brookings Institution; Centre for Economic Policy Research (CEPR); Australian National University (ANU)

Chris Otrok

University of Missouri; Federal Reserve Banks - Federal Reserve Bank of St. Louis

Eswar S. Prasad

Cornell University - Dyson School of Applied Economics and Management; Cornell University - Department of Economics; Brookings Institution; NBER; IZA Institute of Labor Economics

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Abstract

We develop a new dynamic factor model that allows us to jointly characterize global macroeconomic and financial cycles and the spillovers between them. The model decomposes macroeconomic cycles into the part driven by global and country-specific macro factors and the part driven by spillovers from financial variables. We consider cycles in macroeconomic aggregates (output, consumption, and investment) and financial variables (equity and house prices, and interest rates).We find that the global macro factor plays a major role in explaining G-7 business cycles, but there are also spillovers from equity and house price shocks onto macroeconomic aggregates. These spillovers operate mainly through the global macro factor rather than the country-specific macro factors (i.e., these spillovers affect business cycles in all G-7 economies) and are stronger in the period leading up to and following the global financial crisis. We find little evidence of spillovers from macroeconomic cycles to financial cycles.

Keywords: global business cycles, global financial cycles, common shocks, international spillovers, dynamic factor models

JEL Classification: E32, F4, C32, C1

Suggested Citation

Ha, Jongrim and Kose, M. Ayhan and Otrok, Christopher and Prasad, Eswar S., Global Macro-Financial Cycles and Spillovers. IZA Discussion Paper No. 13000, Available at SSRN: https://ssrn.com/abstract=3546397

Jongrim Ha (Contact Author)

World Bank ( email )

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M. Ayhan Kose

World Bank

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Brookings Institution

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Centre for Economic Policy Research (CEPR)

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Christopher Otrok

University of Missouri ( email )

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Eswar S. Prasad

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Brookings Institution ( email )

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