Has Globalization Increased the Synchronicity of International Business Cycles?

Article excerpt

From the business cycle peak at the end of 2007 to the trough in mid-2009, the U.S. economy shrank by 5 percent and lost nearly 9 million jobs, making the 2007-09 recession the most severe downturn of the post-World War II era. However, the United States was not alone; the downturn was global. Global output fell more than 5 percent during this period and most advanced economies simultaneously experienced a recession. Viewed from this perspective, the startling feature of the recent recession was not only its depth but its breadth--no event since the Great Depression has produced such wide-ranging consequences.

While the financial crisis in the United States in part sparked the global downturn, it is the slowdown in Europe that threatens the U.S. economy today. In his June 2012 testimony to Congress, Federal Reserve Chairman Ben Bernanke said, "The crisis in Europe has affected the U.S. economy by acting as a drag on our exports, weighing on business and consumer confidence and pressuring U.S. financial markets and institutions." Going further, Bernanke noted, "... the situation in Europe poses significant risks to the U.S. financial system and economy and must be monitored closely."

The global recession and continuing tremors in advanced economies suggest that the degree of synchronization among business cycles internationally has increased significantly. Lurking in the background of the increase in synchronization is the dramatic increase over the past 30 years in the volume of trade in goods and international financial holdings. The number of bilateral and regional free trade agreements has increased steadily over this period and the volume of trade in goods has followed suit. Financial connections have increased as countries liberalize financial markets.

This article shows that business cycles have become more synchronized over the past 20 years. After identifying the dates of expansions and recessions for a group of 32 industrialized countries since 1960, Section I shows that business cycles have become more synchronized over the past 20 years. Section II describes how increased global trade in goods and financial products have contributed to the increase in business cycle synchronicity. It then shows that there is little evidence that financial linkages have affected the synchronization of business cycles internationally. However, trade does affect the synchronization of business cycles. Countries with high trade volume have more synchronized business cycles.


Determining what impact, if any, globalization has had on the synchronization of business cycles internationally requires clear definitions of business cycles and synchronization. This section estimates the dates of recessions and expansions for 32 countries. Countries were included based on their size and the availability of data. Table Al of Appendix I provides the details. With the 32 countries in the sample representing nearly 70 percent of global output, this section also documents basic facts about international business cycles and creates a global recession index that measures the global business cycle since 1960. The index highlights the severity of the most recent downturn. Finally, the section measures business cycle synchronicity between each country-pair in the sample. Since around 1990, business cycles have become much more synchronized internationally.

Dating international business cycles

Economic activity tends to follow a cyclical pattern. Activity increases during an expansion until it reaches a peak, then declines during a recession until it reaches a trough. The cycle is then repeated. A common definition of recession is two consecutive quarters of declining real GDP. However, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), the arbiter of U.S. business cycle peaks and troughs, takes a broader view: "A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators" (NBER 2008). …