Working Paper: CEPR ID: DP15787
Authors: Gabriel Prezquirs; Maximo Camacho; Matias Jose Pacce
Abstract: To analyze the international transmission of business cyclefluctuations, we propose a new multilevel dynamic factor model with a block structure that (i) does not restrict the factorsto being orthogonal and (ii) mixes data sampled at quarterly and monthly frequencies. By means of Monte Carlo simulations, we show the high performance of the model in computing inferences of the unobserved factors, accounting for the spillover effects, and estimatingthe model's parameters. We apply our proposal to data from the G7 economies by analyzingthe responses of national factors to shocks in foreign factors and by quantifying thechanges in national GDP expectations in response to unexpected positive changes in foreignGDPs. Although the share of the world factor as a source of the international transmissionof fluctuations is still signifi cant, this is partially absorbed by the spillover transmissions. Inaddition, we document a pro-cyclical channel of international transmission of output growthexpectations, with the US and UK being the countries that generate the greatest spilloversand Germany and Japan being the countries that generate the smallest spillovers. Therefore,policymakers should closely monitor the evolution of foreign business cycle expectations.
Keywords: spillovers; business cycle; mixed-frequency
JEL Codes: E32; C22; F42; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unexpected positive changes in foreign GDPs (F69) | national GDP expectations (E20) |
| foreign economies experience positive shocks (F41) | domestic economies react positively (F69) |
| US and UK (F53) | largest spillover effects on other G7 countries (F69) |
| Germany and Japan (N44) | least contribution to spillover effects (F62) |