1. ECON3315 International Economic Issues Instructor: Patrick M. Crowley Issue 21: International Business Cycles

2. Overview Review of business cycle definition Review of business cycle definition International transmission mechanisms International transmission mechanisms Is there an international business cycle? Is there an international business cycle? Are there independent regional business cycles? Are there independent regional business cycles? Shocks – symmetric vs asymmetric Shocks – symmetric vs asymmetric Synchronization Synchronization Recent research Recent research

3. Review of business cycle definition Business cycle consists of 2 phases – boom (growth) and bust (recession) Business cycle consists of 2 phases – boom (growth) and bust (recession) Recession is roughly 9 months on average whereas expansion is now on average around 4-9 years. Recession is roughly 9 months on average whereas expansion is now on average around 4-9 years.

4. International transmission mechanisms If these are similar between countries, what causes them to be similar? If these are similar between countries, what causes them to be similar? Closer together, more trade they do (Gravity model) more likely GDP will be affected in both countries Closer together, more trade they do (Gravity model) more likely GDP will be affected in both countries Capital flows – depends on FDI, whether the country is a major financial market center. Capital flows – depends on FDI, whether the country is a major financial market center. Wealth effects from 24/7 asset markets – e.g. stockmarkets tend to rise and fall in tandem Wealth effects from 24/7 asset markets – e.g. stockmarkets tend to rise and fall in tandem

5. Is there an international business cycle?  International in the sense that is there a “tipping point” such that if more than a certain number of countries go into recession, does the world go into recession?  Other point of view might be that certain type of event that causes a recession might make it more likely to be a global recession.  Examples: Great depression, Oil price shocks of the 70s, current Great recession. Counterexamples: South East Asian crisis, Debt crisis of the mid-1980s, Japan in the 1990s.  Interesting issue, as the next question should be if so, what drives this cycle?  Many economists have thought of “globalization” as driving an “international business cycle”

6. Could there be independent regional cycles? Could regional trade blocs promote independent business cycles? Economic logic – more trade and investment linkages between countries on same continent, more likely that regional business cycles will occur. Michael Artis (Univ of Manchester, UK) first to assert that there is an EU business cycle. Led to idea that maybe, like EU, other regional integration agreements should look to integrate further. Most research appears to show that indeed there is an EU cycle. Similarly there is a NAFTA cycle as well, but this is because US dominates NAFTA.

7. Shocks – symmetric vs asymmetric Most economists think in terms of shocks. 4 types of shocks according to 2 classifications: i) i)Demand vs supply shocks. Demand – e.g. consumers suddenly spend less Supply – e.g. technological improvement allows greater production with same factors ii) ii)Symmetric vs asymmetric Across several countries vs just one country But can asymmetric shocks become symmetric?

8. Synchronization Another way to think of this is in terms of a concept from physics known as “synchronization”. This is like correlation except that we are looking at whether cycles are of the same periodicity, and are phased the same (i.e. move together through time).  Using this approach you can compare cycles between different countries and see how closely they behave through time.  Recent research tends to suggest that more synchronization comes from globalization than from regional trading blocs, but this can reverse if there is a major integration initiative going on.