Abstract
This paper proposes output gap dispersion as a measure of economic synchronization patterns across the world economies. Utilizing a novel, multivariate quantile causality testing methodology and data from a set of 45 advanced and emerging nations, we present evidence of significant causal effects of U.S. monetary policy measures over synchronization patterns across the advanced and emerging economy business cycles, even after controlling for various risk and uncertainty proxies. While U.S. monetary policy actions cause significant interdependence in business cycles across advanced economies, we find that the Fed’s policy decisions also contribute to uncertainty in industrial output patterns. U.S. monetary policy actions are also found to have significant causal effects on the dispersion of emerging market output gaps at low quantiles, suggesting that policy actions by the U.S. Fed drive synchronized economic activity across emerging nations. The findings have significant implications, particularly for policy makers in emerging economies, when it comes to the coordination of their domestic as well as regional monetary policies in response to monetary policy shocks from the U.S.
Similar content being viewed by others
Notes
The data for SSR and EMS are available from the Reserve Bank of New Zealand and the data for EPU index is available at http://www.policyuncertainty.com/.
The great bond massacre (Fortune, 1994) by Al Ehrbar. Fortune magazine, February 3, 2013.
This period also coincides with the announcement of the quantitative easing program by the European Central Bank.
References
Ahmed AD, Huo A (2019) Impacts of China’s crash on Asia-Pacific financial integration: Volatility interdependence, information transmission and market co-movement. Econ Model 79:28–46
Ali, S., Badshah, I., Demirer, R. (2022). Value-at-Risk and the Cross Section of Emerging Market Hedge Fund Returns. Glob Financ J 52, 100693.
Anaya, P., Hachula, M., Offermanns, C. J. 2017. Spillovers of U.S. unconventional monetary policy to emerging markets: The role of capital flows. J Int Money Financ 73, Part B (May 2017), 275–295.
Arouri M, Jawadi F, Nguyen DK (2013) What can we tell about monetary policy synchronization and interdependence over the 2007–2009 global financial crisis? J Macroecon 36:175–187
Atanasov V (2018) World output gap and global stock returns. J Empir Financ 48:181–197
Bachmann R, Bayer C (2013) “Wait-and-see” business cycles? J Monet Econ 60:704–719
Baker SR, Bloom N, Davis SJ (2016) Measuring Economic Policy Uncertainty. Q J Econ 131:1593–1636
Balcilar M, Demirer R, Gupta R, Eyden RV (2017) The Impact of US Policy Uncertainty on the Monetary Effectiveness in the Euro Area. J Policy Model 39(6):1052–1064
Balcilar M, Gupta R, Nguyen DK, Wohar ME (2018) Causal effects of the United States and Japan on Pacific-Rim stock markets: nonparametric quantile causality approach. Appl Econ 50(53):5712–5727
Balcilar, M., Bathia, D., Demirer, R., Gupta, R. 2019. Credit Ratings and Predictability of Stock Return Dynamics of the BRICS and the PIIGS: Evidence from a Nonparametric Causality-in-Quantiles Approach. Working paper. Dept Econ Univ Pretoria.
Bekaert G, Hoerova M, Duca ML (2013) Risk, uncertainty and monetary policy. J Monet Econ 60:771–788
Bekaert G, Harvey CR, Ng A (2005) Market integration and contagion. J Bus 78(1):39–69
Bekaert G, Hodrick RJ, Zhang X (2009) International stock return comovements. J Financ 64(6):2591–2626
Billio M, Caporin M (2005) Multivariate Markov switching dynamic conditional correlation GARCH representations for contagion analysis. Stat Methods Appl 14:145–161
Bloom N (2009) The impact of uncertainty shocks. Econometrica 77:623–685
Bloom, N., Floetotto, M., Jaimovich, N., Saporta-Eksten, I., Terry, S.J., 2012. Really Uncertain Business Cycles. NBER Work Papers 18245.
Bloom N, Floetotto M, Jaimovich N, Saporta-Eksten I, Terry SJ (2018) Really Uncertain Business Cycles. Econometrica 86(3):1031–1065
Bordo MD, Helbling TF (2001) International Business cycle Synchronization in Historical Perspective. Manch Sch 79(2):208–238
Broock WA, Scheinkman JA, Dechert WD, LeBaron B (1996) A test for independence based on the correlation dimension. Econ Rev 15(3):197–235
Caraiani P (2012) Nonlinear dynamics in CEE stock markets indices. Econ Lett 114(3):329–331
Caldara, D., Iacoviello, M. 2019. Measuring Geopolitical Risk. Working paper, Board of Governors of the Federal Reserve Board, December 2019.
Colombo V (2013) Economic policy uncertainty in the US: Does it matter for the Euro area? Econ Lett 121(1):39–42
Cooper I, Priestley R (2009) Time-Varying Risk Premiums and the Output Gap. Rev Financ Stud 22(7):2801–2833
Demirer R, Yuksel A, Yuksel A (2021) On the hedging benefits of REITs: The role of risk aversion and market states. Econ Bus Lett 10(2):126–132
De Vita G, Kyaw K (2008) Determinants of Capital Flows to Developing Countries: a Structural VAR Analysis. J Econ Stud 35:304–322
Eichengreen B (2010) Lessons of the Crisis for Emerging Markets. IEEP 7(1):49–62
Ha, J., Kose, A., Ohnsorge, F. L. 2019. Global inflation synchronization. Policy Research The World Bank. Work Paper 8768.
Jeong K, Härdle WK, Song S (2012) A consistent nonparametric test for causality in quantile. Econ Theor 28:861–887
Jurado K, Ludvigson SC, Ng S (2015) Measuring Uncertainty. Am Econ Rev 105(3):1177–1215
Karadimitropoulou A (2018) Advanced economies and emerging markets: Dissecting the drivers of business cycle synchronization. J Econ Dyn Control 93:115–130
Kose MA, Otrok C, Prasad E (2012) Global Business Cycles: Convergence or Decoupling? Int Econ Rev 53(2):511–538
Kose MA, Prasad ES (2010) Emerging Markets: Resilience and Growth amid Global Turmoil. Brookings Institution Press, Washington, DC
Kose, A., Lakatos, C, Ohnsorge, F. K., Stocker, M. 2017. The global role of the US economy: Linkages, policies and spillovers. Australian National University, CAMA Work Paper 13/2017.
Krippner, L. 2013. A Tractable Framework for Zero Lower Bound Gaussian Term Structure Models. Discussion Paper, Reserve Bank of New Zealand, 2013/02.
Ludvigson, S. C., Ma, S. and Ng, S. 2020. Uncertainty and Business Cycles: Exogenous Impulse or Endogenous Response? Am Econ J Macroecon, forthcoming.
Miranda-Agrippino, S., Rey, H. 2015. World asset markets and the global financial cycle. NBER Work Paper: 21722 (Revised Feb. 2018).
Nishiyama Y, Hitomi K, Kawasaki Y, Jeong K (2011) A consistent nonparametric Test for nonlinear causality - specification in time series regression. J Econ 165:112–127
Nitschka T (2014) Developed markets’ business cycle dynamics and time-variation in emerging markets’ asset returns. J Bank Financ 42:76–82
Passari E, Rey H (2015) Financial flows and the international monetary system. Econ J 125(584):675–698
Rey, H. 2018. Dilemma not trilemma: The global financial cycle and monetary policy independence. NBER Working Paper: 21162 (Feb. 2018).
Salisu, A., Gupta, R., Demirer, R. (forthcoming). Global Financial Cycle and the Predictability of Oil Market Volatility: Evidence from a GARCH-MIDAS Model. Energy Econ
Wu JC, Xia FD (2016) Measuring the Macroeconomic Impact of Monetary Policy at the Zero Lower Bound. J Money, Credit, Bank 48(2–3):253–291
Yeyati EL, Williams T (2012) Emerging Economies in the 2000s: Real Decoupling and Financial Recoupling. J Int Money Financ 31(8):2102–2126
Author information
Authors and Affiliations
Corresponding author
Ethics declarations
Conflict of Interest
The authors declare no conflict of interest.
Additional information
Publisher's Note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Rights and permissions
About this article
Cite this article
Balcilar, M., Demirer, R. U.S. monetary policy and the predictability of global economic synchronization patterns. J Econ Finan 46, 473–492 (2022). https://doi.org/10.1007/s12197-022-09577-9
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s12197-022-09577-9