The paper refers to capacity utilisation, applying a short-cut used in business cycle research to yearly GDP and investment data from 1960 to the present for 22 countries. The basic idea is that the empirical short-run fluctuations of the capital output ratio v are mainly due to cyclical changes in capital utilisation. Accepting this, the individual HP filtered long-run trend estimate vt for country i can be used to identify the actual deviation of any respective vt from its 'equilibrium' level, which in turn allows to quantify capital utilisation. This method is easy to implement and gives an internationally perfectly comparable measure. Comparisons of these capacity utilisation time series with conventional measures (survey data, output gaps) show high correlations, supporting the view that our measure is a useful proxy for a country's position in the business cycle. Next, principal component analysis is used to extract the common variance of these series for our 22 countries in the sample, resulting in a small number of orthogonal factors with eigen values > 1. These can readily be interpreted as distinct international business cycle country groups. The same time series are then submitted to a hierarchical cluster analysis, which reveals a 4-cluster-solution. These clusters are suggested as a starting point for further explorations into the regularities as well as the causes of international cyclical co-movement (or the lack of it).

International Business Cycles: Theory and Evidence

The analysis of synchronization among regional or national business cycles has recently been attracting a growing interest within the economic literature. Far less attention has instead been devoted to a closely related issue: given a certain level of synchronization, some economies might be systematically ahead of others along the swings of the business cycle. We analyze this issue within a system of economies and show that leading (or lagging behind) is a feature that does not occur at random across the economies. In addition, we investigate the economic drivers that could explain this behavior. To do so, we employ data for 48 conterminous US states between 1990 and 2009.

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Business cycle dynamics across the US states

We study the synchronization of credit booms and busts among 12 major European economies and the United States between 1972-2011. We propose a regression-based procedure to test whether boom-bust phases of credit cycles coincide across countries and to cluster countries with positively synchronized credit cycles. We find strong evidence against the existence of a common credit cycle across all countries. Instead, the credit cycles of Austria, Belgium, Germany, Ireland, and the Netherlands are clustered together, while Denmark, Finland, France, Italy, Spain, Sweden, the UK, and the US belong to another distinct cluster. Overall, the relationship among credit cycles is found to be stable over time. However, within each of the two clusters, credit cycles have been converging at least since the last decade. Using a simultaneous equations model, we find that deeper financial integration and a higher degree of business cycle co-movement are associated with stronger credit cycle synchronization.

The synchronization of European credit cycles

We evaluate the relation between financial and trade integration in new (formerly central-planned economies) and old (developed) EU countries. Classical and moving correlation shows the strong relation in the pre-crisis period. Dynamic correlation confirms strong relation for long and business cycle frequencies. Specification via wavelet cospectrum reveals that the long frequencies are correlated in 2000-09, business cycle frequencies in 1993-94, 2003-04 and middle frequencies generally in 2008-2010. The process of financial integration was stronger in the old EU member countries, the process of trade integration in the new member countries. The progress was smaller in financial compared to the trade integration. Classification-JEL: E44, F15, F21, F36, G15, C23, C36

Financial and Trade Integration of Selected EU Regions: Dynamic Correlation and Wavelet Approach

We focus on changes in dynamic correlation during the recent financial crisis. The results show different responses to this symmetric shock in V4 countries. We discuss possible specialization if the dynamic correlation increases only at certain of the frequencies. Especially, in case of the Czech Republic where the variability of dynamic correlation in business cycle frequencies increased in relation to the euro area, whereas decreased in relation to Germany. Consequently, we point out to the limitations of a correlation and concordance index as common indicators of business cycle synchronization in time domain.

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Variability of Dynamic Correlation - The Evidence of Sector-Specific Shocks in V4 Countries

(2012). Financial integration and international transmission of business cycles: evidence from dynamic correlations. Applied Economics Letters: Vol. 19, No. 8, pp. 735-738.

Georgiana Nicoleta Rosoi

Papers

Financial integration and international transmission of business cycles: evidence from dynamic correlations