Working Paper: NBER ID: w26798
Authors: Jongrim Ha; Ayhan Kose; Christopher Otrok; Eswar S. Prasad
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 financial cycles; Macroeconomic cycles; Spillovers; Dynamic factor model; G7 economies
JEL Codes: C1; C32; E32; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Global macroeconomic factor (F62) | G7 business cycles (F44) |
| Equity price shocks (G19) | Global macroeconomic factor (F62) |
| Housing price shocks (R31) | Global macroeconomic factor (F62) |
| Global macroeconomic factor (F62) | Interest rates (E43) |
| Equity price shocks (G19) | G7 business cycles (F44) |
| Housing price shocks (R31) | G7 business cycles (F44) |