To study and identify the linkages of business cycles between advanced and emerging economies

Abstract

Using GDP data of 196 countries across Globe, we present the consistent evidence of co-movements of business cycles of developed and emerging economies. The presence of time lag provides a strong support of transmission of business cycles from developed economies to emerging economies. The study of channels of engagements between these economies proves that the developing economies that engage with developed countries for trade and financial transactions show a high degree of correlation in their business cycles. These co-movements are found to be highly in synchronization at times of crisis and financial shocks in the developed economies. The economies that have high dependency on foreign funding in their capital and equity markets foster this relationship very strongly at times of crisis when liquidity evaporates from these markets very quickly. The high degree engagement in economies of regional proximity in areas – countries of East Asia, countries of European Union, North and South America - supports the argument of transmission through established channels.