Global Macro-Financial Cycles and Spillovers

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.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. JEL Classification: E32, F4, C32, C1

Essays on applied macroeconomics and monetary policy

“…This implies that there exist a global cycle in credit that accounts for about one-third of variation in the credit growth on average for the sample of 17 countries. This is comparable to the results found by Hirata et al (2012); but significantly larger than that found by Ha et al (2017) who only find 2 to 4 percent contribution of the global factor. The remaining variance is attributable to idiosyncratic components, which could include regional, country-specific or variable-specific components.…”

“…Only Portugal has less than 20 percent variation in equity-price growth attributable to the global factor. The average share of variance attributable to the global equity-price factor that I find is smaller than the studies that use constant parameter models (Ha et al (2017); Hirata et al (2012); ) who account for about 60 percent variation attributable to the global factor. Miranda-Agrippino and Rey (2015) find that 66 percent of the variation in returns of risky assets is attributable to the global factor.…”

“…12 See Cesa-Bianchi (2013); Cesa-Bianchi et al (2015); Ciccarelli et al (2012); Gambetti and Musso (2017); Eickmeier and Ng (2011) for international transmission of the financial shocks and Hubrich and Tetlow (2015); Nason and Tallman (2015); Prieto et al (2016); Claessens et al (2009Claessens et al ( , 2010Claessens et al ( , 2012; Borio (2014);Jordà et al (2017) for country-specific analysis. 13 For empirical research on macro-financial spillovers, see Helbling et al (2011); Eickmeier and Ng (2011);Ha et al (2017) They document that global shocks in financial variables are influential in driving macroeconomic fluctuations. Ciccarelli et al (2012) find that the common components of both financial and macroeconomic variables play important role in explaining cross-border spillovers.…”

One Ring to Rule Them All? New Evidence on World Cycles

“…Long historical comparisons based on quarterly data are almost exclusively focused on G7 countries(Kose, Otrok and Whiteman (2008),Doyle and Faust (2005),Ha et al (2017)). Studies with a broader geographical focus are constrained to the post 90's because of data constraints in EMs and smaller advanced economies (e.g.…”

Real and Financial Asymmetries in the Euro Area

“…International spillovers appear to be quantitatively pronounced, and the strength and direction of spillover effects are found to evolve heterogeneously across G7 countries. Ha et al (2020) apply a dynamic factor model to G7 countries to jointly characterize global macroeconomic and financial cycles and the spillovers between them. The paper distinguishes between global, variable and country specific factors of macroeconomic aggregates and financial variables.…”