Regionalization vs. Globalization

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: Both global and regional economic linkages have strengthened substantially over the past quarter century. We employ a dynamic factor model to analyze the implications of these linkages for the evolution of global and regional business cycles. Our model allows us to assess the roles played by the global, regional, and country-specific factors in explaining business cycles in a large sample of countries and regions over the period 1960-2010. We find that, since the mid-1980s, the importance of regional factors has increased markedly in explaining business cycles especially in regions that experienced a sharp growth in intra-regional trade and financial flows. By contrast, the relative importance of the global factor has declined over the same period. In short, the recent era of globalization has witnessed the emergence of regional business cycles. Terms of use: Documents in EconStor may JEL Classification 2 EXECUTIVE SUMMARYThe inexorable forces of globalization and regionalization have reshaped the world economic landscape over the past quarter century. Global trade and financial flows have registered unprecedented growth during this period. Intra-regional economic linkages have also become much stronger with the proliferation of regional trade agreements and common currency areas.These developments have appeared to affect the evolution of global and regional business cycles in unexpected ways. For example, despite the presence of strong global trade and financial linkages, there was significant variation in growth performance across different regions during the 2008-09 global financial crisis. Specifically, some regions (e.g., Asia) exhibited surprising resilience during the worst of the financial crisis and rapidly returned to high growth whereas some others (e.g., North America and Europe) experienced deep and prolonged contractions.These observations lead to a basic question: "Have regional elements become more important in driving business cycles in an era of globalization?" We answer this question using a dynamic factor model. Our model allows us to analyze the sources of fluctuations in output, consumption, and investment in a sample of 106 countries over the period 1960-2010. We consider cycles in seven regions: North America, Europe, Oceania, Asia, Latin America and the Caribbean, Middle East and North Africa, and Sub-Saharan Africa.Our results point to a surprising conclusion: The recent era of globalization has witnessed the emergence...

Is There Really a Global Business Cycle? A Dynamic Factor Model with Stochastic Factor Selection

“…We also conduct our estimations using two separate subsamples, i.e., one for the subperiod 1961 − 1985 and one for the subperiod 1986 − 2014. This follows other papers such as Kose et al (2008), Kose et al (2012) and Hirata et al (2013) who assume that there is a demarcation point in the mid 1980s that effectively separates the preglobalization period from the globalization period.…”

“…Third, upon comparing both subperiods, there is evidence of increased regionalization, i.e., an increased variance share for the regional factor in the globalization period compared to the preglobalization period. This phenomenon has been documented in the literature (see e.g., Hirata et al, 2013). Regionalization occurs globally as the increased variance share of the regional factor can be observed for the world as a whole.…”

“…"106 countries" is a check where the sample consists of N = 106 countries that can belong to either one of our 6 regions instead of the 60 countries reported in Appendix A. We refer to Kose et al (2012) or Hirata et al (2013) for the list of countries included in this extended sample. "Output only" is a check whether the factor model is estimated using only K = 1 variable -i.e., output -instead of 3, i.e., output, consumption, investment.…”

“…Another branch of the literature has investigated the regional dimension of business cycle synchronization. A comprehensive overview of this literature is provided by Hirata et al (2013) who provide information on the considered regions, countries and variables, sample period, methodology, objectives and results for about 100 studies.…”

“…While they argue that regional proximity matters, their approach identifies clusters of countries that are determined not only by geographical distance but also by other characteristics such as institutions and linguistic similarity. Hirata et al (2013) estimate a dynamic factor model that contains a global factor and factors for seven geographical regions using a dataset that consists of data on output, consumption and investment for 106 countries over the period 1960 − 2010.…”