DP4652 The International Business Cycle in a Changing World: Volatility and the Propagation of Shocks in the G-7

Author(s): Michael J Artis , Denise Osborn , Pedro Perez-Vazquez

Publication Date: October 2004

Keyword(s): international business cycles , european integration , time variation , volatility

JEL(s): E32 , F02 , F43

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP4652.asp

This Paper examines the changing relationships between the G7 countries through VAR models for the quarterly growth rates, estimated both over sub-periods and using a rolling data window. Six trivariate models are estimated, all of which include the US and a European (E15) aggregate. In relative terms, the conditional volatility of E15 growth has declined more since 1980 than the well-documented decline for the US. The propagation of shocks has also changed, with the volatility and propagation effects separated by applying shocks of pre-1980 magnitude to VARs estimated over various periods. Rolling estimation reveals that E15 has a steadily increasing impact on the US economy over time, while the effects of the US on Europe have been largest during the 1970s and the late 1990s.