Series: Working Papers. 1925.
Author: Danilo Leiva-Leon and Lorenzo Ductor.
Published in: Journal of International Money and Finance, Volume 120, Art 102533, February 2022
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Abstract
We rely on a hierarchical volatility factor approach to estimate and decompose time-varying
second moments of countries output growth into global, regional and idiosyncratic contributions. We document a “global moderation” of international business cycles, defined as a persistent decline in macroeconomic volatility across the main world economies. This decline in volatility was induced by a reduction in the underlying global component, uncovering a new level of interconnection of the world economy. After assessing the importance of different economic factors, we find that the reduction in overall countries macroeconomic volatility can be mainly explained by the increasing trade openness exhibited in recent decades. Likewise, the idiosyncratic component of countries volatility is also influenced by domestic monetary policies.