Miankhel, Adil Khan and Kalirajan, Kaliappa and Thangavelu, Shandre (2010): Integration, decoupling and the global financial crisis: A global perspective.
Download (391Kb) | Preview
The recent global recession requires policy makers to identify the relative importance of shock transmission mechanisms in each region and devise counter policy measures against future idiosyncratic shocks. In the last decade, world dynamics have changed considerably due to increased openness and integration requiring considering business cycles at regional levels. This paper analyzes the business cycle movements of the EU, ASEAN+3, NAFTA, MERCOSUR and SAARC regions to investigate why the subprime mortgage crisis of 2007 did not spread globally compared to the crisis that began with the fall of Lehman Brothers in September 2008. Employing a Panel Vector Autoregressive framework (PVEC), this study finds that the subprime mortgage crisis shock originated in the real sector (falling US housing prices) and was transmitted through trade variables. Due to absence of short term trade variables transmission mechanism in all regions except the MERCOSUR and SAARC, the shock did not spread widely to other regions. Even in the MERCOSUR and SAARC, due to limited goods exports exposure to the US, the shock was not significant. Resultantly, these regions exhibited a decoupling phenomenon during the subprime mortgage crisis. In contrast, the second shock originated with the fall of Lehman Brothers in 2008 and was transmitted through financial variables. Due to the presence of the short term causal relationship of the financial variable with GDP in all regions except SAARC, the slowdown contagion spread to most regions. As a result, the slowdown triggered the trade variables shock transmission mechanism and the SAARC region was also affected. Consequently, a business cycle convergence phenomenon was observed in the regions. Therefore, business cycles decoupling and convergence phenomena in the regions depend not only on the origin of the shock but also on the relative importance of the transmission mechanisms in each region.
|Item Type:||MPRA Paper|
|Original Title:||Integration, decoupling and the global financial crisis: A global perspective|
|Keywords:||Integration, Decoupling, Financial crisis, EU, NAFTA, ASEAN, MERCOSUR, SAARC, Business cycle, FDI, Exports, Intra industry Trade, Sub prime mortgage crisis, Lehman Brothers, Short term capital flows, Panel Cointegration, Panel stationarity, Panel Vector Error Correction (PVEC)|
|Subjects:||F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance
F - International Economics > F0 - General
O - Economic Development, Technological Change, and Growth > O5 - Economywide Country Studies
N - Economic History > N2 - Financial Markets and Institutions
E - Macroeconomics and Monetary Economics > E0 - General > E01 - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
E - Macroeconomics and Monetary Economics > E2 - Macroeconomics: Consumption, Saving, Production, Employment, and Investment > E21 - Consumption; Saving; Wealth
D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D53 - Financial Markets
F - International Economics > F2 - International Factor Movements and International Business
O - Economic Development, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles
N - Economic History > N1 - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations
C - Mathematical and Quantitative Methods > C5 - Econometric Modeling
C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models; Multiple Variables > C33 - Models with Panel Data; Longitudinal Data; Spatial Time Series
F - International Economics > F3 - International Finance
F - International Economics > F1 - Trade
M - Business Administration and Business Economics; Marketing; Accounting > M2 - Business Economics
G - Financial Economics > G0 - General
O - Economic Development, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity
C - Mathematical and Quantitative Methods > C0 - General > C01 - Econometrics
B - History of Economic Thought, Methodology, and Heterodox Approaches > B4 - Economic Methodology > B41 - Economic Methodology
|Depositing User:||Adil Khan Miankhel|
|Date Deposited:||21. May 2010 19:30|
|Last Modified:||14. Feb 2013 13:17|
Ahmed, SM & Ansari, M, I 1998, ‘ Financial sector development and economic growth: the South-Asian experience’, Journal of Asian Economics, vol.9, no.3, pp.503-179.
Ahmed, S 1998, ‘The legal environment, banks, and long run economic growth’, Journal of Money, Credit, and Banking, vol.30, pp. 614–20.
Ando, M & Kimura, F 2003, ‘ The Formation of International Production and Distribution Networks in East Asia’, Mimeo, Keio University, Tokyo, Japan.
Arestis, P, Demetriades, P & Luintel, K 2001, ‘ Financial development and economic growth: the role of stock markets’, Journal of Money, Credit, and Banking, vol.33, no.1,pp. 16–41.
Arndt, SW 2006, ‘ Regional currency arrangements in North America, Working Paper’, Oesterreichische Nationalbank, May.
Artis, MJ, & Okubo, T 2008, ‘The Intranational Business Cycle: evidence from Japan’, Discussion Papers, CEPR, no. 6686.
Baxter, M & Kouparitsas, MA 2005, ‘Determinants of Business Cycle Comovement: a robust analysis’, Journal of Monetary Economics, vol.52, no. January, pp. 113–57.
Baldwin, R 2006, ‘The euro's trade effects’, Working Paper 594, ECB. Bhagwati, J 1998, ‘The Capital Myth: the difference between trade in widgets and dollars’, Foreign Affairs, vol. 77, no.3, pp. 7–12.
Bordo, MD & Helbling, T 2004, ‘Have national business cycles become more synchronized?’, in Macroeconomic Policies in H. Siebert (ed.), The World Economy , Springer Verlag, Berlin-Heidelberg.
Borensztein, E, Gregorio, JD & Lee, J-W 1998, ‘How does Foreign Direct Investment affect economic growth?’, Journal of International Economics, vol. 45, no.1, pp.115–35.
Breitung, J & Meyer, W 1991, ‘Testing for unit roots in panel data: are wages on different bargaining levels cointegrated?’, Working Paper, Institut fur Quantitative Wirtschaftsforschung.
Campbell, J & Perron, P 1991, ‘ Pitfalls and opportunities: what macroeconomists should know about unit roots’, in O. Blanchard & S. Fischer (eds.), NBER Macroeconomics Annual, MIT Press, Cambridge, MA.
Cappiello, L, Hordahl, P, Kadareja, A & Manganelli, S 2006, ‘The Impact of the Euro on Financial Markets’, Working Paper 598, ECB. 30
Calderon, C & Serven, L 2004, The effects of infrastructure development on growth and income distribution, Policy Research Working Paper 3400, The World Bank , Washington.
Carkovic, M & Levine, R 2003, ‘does Foreign Direct Investment accelerate economic growth?’, Working Paper, University of Minnesota,.
Corsetti, G, Pesenti, P & Roubini, N 1998, ‘ Paper tigers: a model of the Asian crises’, Working Paper 6783, National Bureau of Economic Research, Cambridge, MA.
Croux, C, Forni, M & Reichlin, L 2001, ‘ A measure of comovement for economic variables: Theory and empirics’, Review of Economics and Statistics, vol.83, pp. 232-241.
Darvas, Z, Rose, A & Szapary, G 2005, ‘ Fiscal divergence and business cycle synchronization: irresponsibility is idiosyncratic’, Working Paper, no. 11580, National Bureau of Economic Research, Cambridge, MA.
Dooley, M 1994, ‘Are recent Capital inflows to developing countries a vote for or against economic policy reforms?’, Working Paper 295, Department of Economics, University of California, Santa Cruz.
Easterly,W, King, R, Levine R & Rebelo, S 1994, ‘Policy, Technology Adoption and Growth’, Working Paper 4681, National Bureau of Economic Research, Cambridge, MA.
Engle, RF & Granger, CWJ 1987, ‘Co-integration and error correction: Representation, estimation and testing’, Econometrica, vol.55, no.2, pp. 251-276.
Fidrmuc, J 2004, ‘The endogeneity of the optimum currency area criteria, intra-industry trade, and EMU enlargement’, Contemporary Economic Policy, vol. 22, pp. 1–12.
_________& Korhonen, I 2009, ‘The Impact of the Global Financial Crisis on Business Cycles in Asian Emerging Economies’, The Journal of Asian Economics, August 7.
_________, Korhonen, I & Batorova, I 2008, ‘Dynamic Correlation Analysis of Business Cycles of Selected Emerging Countries’, Department of Economic, University of Munich.
Findlay, R 1978, ‘Relative backwardness, direct foreign investment, and the transfer of technology: a simple dynamic model’, Quarterly Journal of Economics, vol.92, pp. 1–16.
Fink, G, Haiss, P & Vukši, G 2004, ‘Changing importance of financial sectors for growth from transition to cohesion and European integration’, Working Paper, EUROPAINSTITUT, Vienna.
Frankel, JA & Rose, AK 1998, ‘The Endogeneity of the Optimum Currency Area Criteria’, Economic Journal, vol. 108 (July), pp. 1009–25.
Gill, I & Homi K 2007, ‘ An East Asian Renaissance: Ideas for Economic Growth’, World Bank, Washington, DC.
Glick, R & Rose, A 2002, ‘ Does a currency union affect trade? The time-series evidence’, European Economic Review , vol. 46, pp.1125-1151. 31
Goldsmith, RW 1966, ‘ The Determinants of Financial Structure’, The OECD, Paris.
Gregory, AW, A C Head & Raynauld, J 1997, ‘Measuring World Business Cycles’, International Economic Review, vol. 38, pp. 677–702.
Grossman, G & Helpman, E 1991, ‘Quality Ladders in the Theory of Economic Growth’, Review of Economic Studies, vol. 58, pp.43-61.
__________ & Helpman, E 1991, ‘ Innovation and Growth in the Global Economy’, MIT Press, Cambridge, MA.
Heathcote, J & Perri, F 2004, ‘Financial globalization and real regionalization’, Journal of Economic Theory, vol 119, no.1, pp.207–243.
Gujarati, D 1995, Basic Econometrics, McGraw-Hill, New York. Hadri, K 2000, ‘ Testing for Stationarity in heterogeneous panel data’, Econometrics Journal, vol. 3, pp. 148–161.
Hecq, A, Palm, FC & Urbain, JP 2005, ‘Testing for common cyclical features in VAR models with cointegration’, Annals Issue of the Journal of Econometrics on Common Features, forthcoming.
Helbling, T, Peter, B, Kose , MA, Kumhof, M, Laxton, D & Spatafora, N 2007, ‘Decoupling the Train? Spillovers and Cycles in the Global Economy’, in World Economic Outlook (April: Washington: International Monetary Fund), pp. 121–60.
Helbling, T &Bayoumi, T 2002, ‘ G-7 business cycle linkages revisited’, Working Paper, IMF.
Helpman, E & Krugman, PR 1985, ‘ Market structure and foreign trade: Increasing returns, imperfect competition and the international economy’, MIT Press, Cambridge, MA.
Hsiao, FST & Hsiao, M CW 2006, ‘FDI, exports, and GDP in east and southeast Asia-Panel data versus time series causality analyses’, Journal of Asian Economics, vol. 17(2006), pp. 1082-1106.
Hughes, H A & Richter, C 2008, ‘ Measuring Spillover and Convergence Effects in the Asia-Pacific Region: Is the US No Longer the Economy of First Resort?’, Mimeo, Loughborough University.
Imbs, J 2004, ‘Trade, Finance, Specialization, and Synchronization’, Review of Economics and Statistics, vol. 86 (August), pp. 723–34.
______ 2006, ‘The Real Effects of Financial Integration’, Journal of International Economics, vol. 68 (March), pp. 296–324.
Im, KS, Paseran, MH, & Shin, Y 2003, ‘ Testing for Unit Roots in Heterogeneous Panels’, Journal of Econometrics , vol. 115, no.1, pp. 53-74. 32
IMF 2009, ‘Crisis and Recovery’, World Economic Outlook, IMF, Washington, DC (April).
IMF 2009, ‘Sustaining the Recovery’, World Economic Outlook, IMF, Washington, DC (October).
Inklaar, R, Jong-A-Pin, R & de Haan, J 2008, ‘ Trade and business cycle synchronization in OECD countries, a re-examination’, European Economic Review , vol. 52, pp.646-666.
Jung, WS & Marshall, PJ 1985, ‘Exports, growth and causality in developing countries’, Journal of Development Economics, vol. 18 (1985), pp.1-12.
Johansen, S 1988, ‘Statistical Analysis of Cointegration Vectors’, Journal of Economic Dynamics and Control, vol. 12, no. 2-3, pp. 231-254.
_________ 1991, ‘Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models’, Econometrica, vol. 59, pp. 1551–1580.
Jones, R & Kierzkowski, H 1990, ‘The role of services in production and international trade: A theoretical framework’, in R. Jones & A. Krueger (eds.), The political economy of international trade: Essays in honor of Robert E. Baldwin, Basil Blackwell, Oxford.
Quah, D 1992, ‘International patterns of growth: I. Persistence in cross-country disparities’, unpublished manuscript, London School of Economics.
Quah, D 1994, ‘Exploiting cross-section variations for unit root inference in dynamic data’, Economics Letters, vol. 44, no. 9–19.
Kao, C 1999, ‘Spurious regression and residual-based tests for cointegration in panel data when the cross-section and time series dimensions are comparable’, Journal of Econometrics, vol. 90, no. 1– 44.
Kimura, F, Takahashi, Y & Hayakawa, K 2007, ‘Fragmentation and Parts and Components Trade: Comparison between East Asia and Europe’, North American Journal of Economics and Finance, vol. 18, pp. 23-40.
King, RG& Levine, R 1993,‘Finance, entrepreneurship, and growth’, Journal of Monetary Economics, vol. 32, pp.513–542.
Krugman, P. R 1980, ‘Scale economies, product differentiation, and the pattern of trade’, American Economic Review, vol.70, no.5, pp. 950–959.
Kalemli-Ozcan, S, Sorensen, B & Yosha, O 2001, ‘Economic integration, industrial specialization, and the asymmetry of macroeconomic fluctuations’, Journal of International Economics , vol. 55, pp.107-137.
Kenen, P 2000, ‘Currency areas, policy domains, and the institutionalization of fixed exchange rates’, Princeton University, April. 33
Kose, MA, Otrok, C & Whiteman,CH 2003, ‘International Business Cycles: World, Region, and Country-Specific Factors’, American Economic Review, vol. 93 (September), pp. 1216– 39.
Kose, MA, Eswar. P& Terrones, M 2003, ‘How does globalization affect the synchronization of business cycles’, American Economic Review, Papers and Proceedings, vol. 93 (May), pp. 56–62.
Kose, MA, Otrok, C & Prasad, E 2008, ‘Global Business Cycles: Convergence or Decoupling?’, Working Papers 14292, National Bureau of Economic Research, Cambridge.
____________________ & Whiteman, CH 2008, ‘Understanding the evolution of world business cycles’, Journal of international Economics, vol. 75, pp. 110-130.
Krugman, PR 1993, ‘ Lessons of Massachusetts for EMU’, in F.Torres & F.Giavazzi (eds.) Adjustment and Growth in the European Monetary Union, Cambridge University Press and CEPR, Cambridge, pp. 241-261.
Krugman, P 1998, ‘What Happened to Asia?’, MIT Press, Cambridge, MA.
Kumakura, M 2006, ‘Trade and business cycle co-movements in Asia-Pacific’, Journal of Asian Economics, vol. 17, pp. 622-645. .
Levin, A, Lin, CF & Chu, J 2002, ‘Unit root tests in panel data: asymptotic and finite sample properties’, Journal of Econometrics, vol.98, pp. 1-24.
Leung, S 1997, ‘Financial deregulation and trade expansion’, in East Asia Trade after the Uruguay Round, Cambridge, pp.78-97.
Lane, P & Milesi-Ferretti GM 2007, ‘The international equity holdings of euro area investors, in R. Anderton & F.di Mauro (eds), The Importance of the External Dimension for the Euro Area: Trade, Capital Flows, and International Macroeconomic Linkages, Cambridge University Press, pp. 95-117.
Makki, SS & Somwaru, A 2004, ‘Impact of foreign direct investment and trade on economic growth: Evidence from developing countries’ American Journal of Agriculture Economics, vol. 86, no. 3 (August), pp.795-801.
McConnell, M & Perez-Quiros, G 2000, ‘ Output fluctuations in the United States: what has changed since the early 1980's , American Economic Review, vol. 90, pp.1464-1476.
McKinnon, R & Pill, H 1997, ‘Credible economic liberalizations and overborrowing’, American Economic Review , vol. 87, no. 2, pp. 189–193.
McKinnon, R 2000, ‘ The East Asian Dollar Standard, Life after Death?’, Economic Notes, Banca Monte dei Paschi di Siena, vol. 29, pp. 31-82.
Mundell, RA 2000, ‘Currency Areas, Exchange Rate Systems and International MonetaryReform’, Universidad del CEMA, Buenos Aires. 34
Naka, A & Tufte, D R 1997, ‘Examining impulse response functions in cointegrated systems’, Applied Economics , vol. 29, pp. 1593-1603.
Pedroni, P 2004, ‘ Panel cointegration. Asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis’, Econometric Theory, vol. 20, pp. 597–625.
Pesaran, MH& Smith, R 1995, ‘ Estimating long-run relationships from dynamic heterogeneous panels’, Journal of Econometrics, vol. 68, pp. 79–113.
______________________& Im, K.S 1996, ‘ Dynamic linear models for heterogeneous panels’, in L. Matyas, P. Sevestre (eds), The Econometrics of panel data: a handbook of theory with applications, Kluwer Academic Publishers, Dordrecht.
Powell, J 1998, ‘Micro- and Macro-Level Financial Reform in Canada’, in Fanelli, R. Medhora & J. Ottawa (eds), Financial Reform in Developing Countries, International Development Research Centre.
Rana, PB 2006. Economic integration in East Asia: Trends, prospects, and a possible roadmap, Working Paper Series on Regional Economic Integration 2, Asian Development Bank. Manila
Rana, PB 2007, ‘ Economic integration and synchronization of business cycles in East Asia’, Journal of Asian Economics, vol.18, pp. 711–725.
Rapach, DE 1998, ‘Macro shocks and fluctuations’, Journal of Economics and Business, vol.50, pp. 23-38.
Rodriguez, F & Rodrik, D 1999, ‘Trade Policy and Economic Growth: A Skeptic’s Guide to the Cross-National Evidence’, working paper 7081, NBER, Cambridge, MA.
Rodrik, D 1995, ‘Political economy of trade policy’, in G.M. Grossman & K.Rogoff (eds.) Handbook of International Economics, vol. 3, Elsevier, Amsterdam.
Rose, A 2000, ‘One money, one market: the effect of common currencies on trade’, Economic Policy, vol. 30, pp.7-46.
Sato, K & Zhang, Z 2006, ‘Real output co-movements in East Asia: Any evidence for a monetary union?’, World Economy, vol. 29, pp.1671-1689.
Shan, JZ & Sun, F 1998, ‘ Export-led growth hypothesis: further econometric evidence from China’, Applied Economics, vol. 30, pp. 1055–65.
Shin, K & Sohn, CH 2006, ‘Trade and financial integration in East Asia: Effects on comovements’, World Economy, vol.29, pp.1649-1669.
Wachtel, P 2001, ‘Growth and Finance: What Do We Know and How Do We Know It?’, International Finance , vol. 4 , no. 3, pp. 335-62. 35
World Bank 2009, Global Development Finance. Charting a Global recovery, World Bank, Washington, DC.
WTO 2008, International Trade Statistics, WTO, Geneva. Yanruni, W. 1999, ‘Foreign direct investment and economic growth in China’, Journal of Asian Economics, vol. 11(2000), pp. 471-475.