Global business cycles:convergence or decoupling?

This paper analyzes the evolution of the degree of global cyclicalinterdependence over the period 1960-2005. We categorize the 106 countries in oursample into three groups—industrial countries, emerging markets, and other developingeconomies. Using a dynamic factor model, we then decompose macroeconomicfluctuations in key macroeconomic aggregates—output, consumption, andinvestment—into different factors. These are: (i) a global factor, which picks upfluctuations that are common across all variables and countries; (ii) three group-specificfactors, which capture fluctuations that are common to all variables and all countrieswithin each group of countries; (iii) country factors, which are common across allaggregates in a given country; and (iv) idiosyncratic factors specific to each time series.Our main result is that, during the period of globalization (1985-2005), there has beensome convergence of business cycle fluctuations among the group of industrialeconomies and among the group of emerging market economies. Surprisingly, there hasbeen a concomitant decline in the relative importance of the global factor. In otherwords, there is evidence of business cycle convergence within each of these two groupsof countries but divergence (or decoupling) between them.[...]