G7 business cycle synchronization and transmission mechanism.
Since Bretton Woods System break down in year 1973. Many economists found that there are more similar business cycle between industrial countries. Recently, Doyle and Faust(2002) proposed the correlation of business cycle between two countries becomes weaker.
Therefore in this search, we try to carry out two different aspect factor that effects the countries¡¦ business cycle correlation. The factor is so-called ¡§transmission mechanism.¡¨
Generally specking, Many empirical analysis have pointed out the temporary factors to the business cycle mainly come from the transferred factors of economic aspect.
What is ¡§Transmission Mechanisms?¡¨ Economists often try to substitute it in
good markets, financial markets, and the coordination of monetary policies. However,
in this duration of the empirical analysis, using only these proxy variables to explain
BCCs between two countries seems too limited. According to this situation, we
believe if the BCCs can be explained by using proxy factors of non-economic variable, the result can be utilized by making up the defect.
We attempt to find new factors in political approach and combine with the ¡§Transmission Mechanisms¡¨ that we have introduced earlier.
To analyze further economic implication in our research, five conclusions have
been summarized below:
Firstly, increasing bilateral trade has significantly provided positive effect to
BCCs among G7 countries from 1980 to 2002. Because bilateral trade intensity index is endogenous , we use exogenous variable as instrumental variable to estimate ¡§Trade¡¨. Secondly, we use Panel method to expand its matrix. Finally, we improve the empirical estimators of insignificant statistics before. So, when we talk about
the relations between BCCs and good and service markets, we must consider these
exogenous factors. Eventually, we will receive more detailed results.
Secondly, although to trade in financial markets can increase the BCCs between
two countries, the statistic report is insignificant . About this
empirical result, we can obtain reasonable explanations from the researches (for
instance: Imbs, 2004 or Kose et al, 2003), they point out that financial markets are
bound excessively by globalization. Therefore, this will aggravatingly make each
country to focus on its specialization. Finally, this situation will make the BCCs
getting collapsed among these countries. This also explains that the specialization
among these countries will reduce the positive effect from the BBCs to financial
Thirdly, in the research, the statistics effect of the trade intensity index and specialization are significant negative. It means that when good in transaction will result in more specialization. Two countries have similar industrial structure.Imbs(2004) consider the problem is the index we use to measure bilateral trade intensity. This index was effected from two countries¡¦ size . If use Clark and van Wincoop¡¦s trade intensity index to measure the effect, we can find that significant specialization by comparative advantage effect.
Fourth, there are high level financial integration between two countries, because international risk sharing result in two countries have different industrial structure.
Lastly, in the research, the statistics effect of the party variables and business
cycle of correlations are very significant. This also indicates the political factor will
play an important role for many sources of the fluctuation tread of BCCs. In other
words, when we discuss the issue of BCCs if miss the contribution of political factors
to the BCCs. Then, this might cause the omitted variable biased, and finally cause
the whole computation become inefficient. In addition, we can have further discussion
by an input of a factor: to conserve the joint benefit of all the member countries in an
economic organization, these countries need to be ruled by the same ideal political
party. Otherwise, the institute will never reach its essential result.
Combining all the conclusions we have shown above, we can find out the BCCs
among G7 countries from 1980-2002. Besides the influence of the ¡§Transmission
Mechanisms,¡¨ the result will be varied by the political factors. In conclusion, we need
to consider the contribution of the political party variables to the BCCs when talking
about this issue, therefore; the original theoretical model can be more persuasive.
According to a statistics of IMF, the BCCs among those industrial countries are
falling little by little in recent years. Therefore, consolidating trade cooperation is
essential for what we believe to improve the BCCs among G7. At the same time, pass
through a strong integrate monetary policy can move forward all the incumbent
parties from all the countries to agree among themselves, and even reach more
substantial effect. From the example like this, we might find evidence from BCCs
issues by discussing the integration process in European Monetary Union.
Advisor:none; none; none; none
School:National Sun Yat-Sen University
School Location:China - Taiwan
Source Type:Master's Thesis
Keywords:political three stage least squares transmission mechanism business cycle of correlations
Date of Publication:06/22/2006