How Does Globalization Affect the Synchronization of Business Cycles?

The phenomenon of globalization, which refers to the rising trade and Ž nancial integration of the world economy, has gathered steam in recent decades. The growth rate of world trade has been greater than that of world output in almost all years since 1960, and the cumulative increase in the volume of world trade is almost three times larger than that of world output over this period. A more dramatic element in the process of globalization has been the surge in cross-border capital  ows over the last two decades. Since the early 1980’s, gross capital  ows have jumped from less than 5 percent to approximately 20 percent of GDP for advanced countries. For emerging markets, gross capital  ows have increased almost fourfold over the same period and now account for roughly 5 percent of GDP in these economies. What is the impact of globalization on the synchronization of business cycles across countries? In this paper, we attempt to address this question by systematically examining the impact of increased trade and Ž nancial integration on international business-cycle comovements. In particular, we analyze the patterns of correlations for industrial as well as developing countries within a uniŽ ed empirical framework. We also examine the effects of different aspects of globalization on output as well as consumption comovement across countries.