Big Data

Deconstructing The International Business Cycle: Why Does A U.S. Sneeze Give The Rest Of The World A Cold?

Date Added: Oct 2010
Format: PDF

The 2008 crisis underscored the interconnectedness of the international business cycle, with U.S. shocks leading to the largest global slowdown since the 1930s. The authors estimate spillover effects across major advanced country regions in a Structural VAR (SVAR) using pre-crisis data. This new method freely estimates the contemporaneous correlation matrix for underlying shocks in the VAR and the associated uncertainty. These results suggest that the international business cycle is largely driven by U.S. financial shocks with a significant impact from global shocks, mainly reflecting commodity prices.