A comparative analysis of the synchronisation of business cycles for developed and developing economies with the world business cycle

Globalisation brought about worldwide changes, including economic and financial integration between countries. This integration implied, in business cycle theory, the emergence of a common business cycle. Most developed economies seem to follow the world business cycle most of the time. However, there is little evidence of the co-movement between emerging markets, such as South Africa, and the common cycle. Factor models, using principal component analysis, were constructed for developed and developing countries with output, consumption and investment data. These factors were compared to the world business cycle. Co-movement was found between some countries and the world factor. The results suggest that there are country-specific and worldwide sources of economic shocks, which play different roles at different times in different countries. This has implications for forecasting the business cycle, especially in times of economic turmoil.

Working paper 506
1 July 2009