Integration, decoupling and the global financial crisis: A global perspective

Miankhel, Adil Khan and Kalirajan, Kaliappa and Thangavelu, Shandre (2010): Integration, decoupling and the global financial crisis: A global perspective.

Abstract

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
• Language: English
• 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, Innovation, 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 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > 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, Innovation, 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 - Panel Data Models ; Spatio-temporal Models; F - International Economics > F3 - International Finance; F - International Economics > F1 - Trade; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M2 - Business Economics; G - Financial Economics > G0 - General; O - Economic Development, Innovation, 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

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