Discussion of

Has Globalization Really Increased Business Cycle Synchronization? by E. Monnet and D. Puy Ambrogio Cesa-Bianchi (BoE and CfM) First CEBRA-BOE-IFM Annual Meeting

Bank of England – October 19-20, 2017

*The views expressed in this paper do not necessarily reflect the position of the Bank of England.

This paper

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Question What is the relation between trade/financial integration and international business cycle comovement? • Perennial question in international macro • Openness: risk-sharing or contagion?

Discussion of E. Monnet and D. Puy (2017) “Has Globalization Really Increased Business Cycle Synchronization?”

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This paper

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Question What is the relation between trade/financial integration and international business cycle comovement? • Perennial question in international macro • Openness: risk-sharing or contagion?

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This paper Applies existing methodologies in a novel way on a new historical data set on industrial production

Discussion of E. Monnet and D. Puy (2017) “Has Globalization Really Increased Business Cycle Synchronization?”

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This paper: 1-page summary I

Business cycle (yit ) ≡ Industrial production in country i

Discussion of E. Monnet and D. Puy (2017) “Has Globalization Really Increased Business Cycle Synchronization?”

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This paper: 1-page summary I

Business cycle (yit ) ≡ Industrial production in country i

I

Synchronization (Si ) ≡ Share of variance of yit explained by global factor

yi,t = βW,i fW,t + βR,i fR,t + εit

⇒ Si =

β2W,i σ2f

Discussion of E. Monnet and D. Puy (2017) “Has Globalization Really Increased Business Cycle Synchronization?”

W

σ2yi

3

This paper: 1-page summary I

Business cycle (yit ) ≡ Industrial production in country i

I

Synchronization (Si ) ≡ Share of variance of yit explained by global factor

yi,t = βW,i fW,t + βR,i fR,t + εit I

⇒ Si =

β2W,i σ2f

W

σ2yi

Estimate Si on four sub-samples to get Sit t=1 Bretton Woods (1951-1971) t=2 Oil shocks (1972-1983) t=3 Great Moderation (1984-2006) t=4 Global financial crisis (2007-2014)

Discussion of E. Monnet and D. Puy (2017) “Has Globalization Really Increased Business Cycle Synchronization?”

3

This paper: 1-page summary I

Business cycle (yit ) ≡ Industrial production in country i

I

Synchronization (Si ) ≡ Share of variance of yit explained by global factor

yi,t = βW,i fW,t + βR,i fR,t + εit I

⇒ Si =

β2W,i σ2f

W

σ2yi

Estimate Si on four sub-samples to get Sit t=1 Bretton Woods (1951-1971) t=2 Oil shocks (1972-1983) t=3 Great Moderation (1984-2006) t=4 Global financial crisis (2007-2014)

I

Estimate panel regression (i = 1, 2, ...20, t = 1, 2, 3, 4)

Sit = αi + γt + β1 · Fin Intit + β2 · Trade Intit + εit Discussion of E. Monnet and D. Puy (2017) “Has Globalization Really Increased Business Cycle Synchronization?”

3

Two main comments

[#1] Business cycle (yit ) ≡ Industrial production • Share of industrial production in GDP has been falling steadily over time • How good is industrial production as a proxy for the business cycle?

Discussion of E. Monnet and D. Puy (2017) “Has Globalization Really Increased Business Cycle Synchronization?”

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Two main comments

[#1] Business cycle (yit ) ≡ Industrial production • Share of industrial production in GDP has been falling steadily over time • How good is industrial production as a proxy for the business cycle?

[#2] Synchronization (Sit ) ≡ Share of variance of yit explained by global factor • ‘Unusual’ synchronization measure in this literature 6

Typically GDP Pearson correlation or pairwise GDP growth differential

• Is it well-suited to answer the question? How to interpret it?

Discussion of E. Monnet and D. Puy (2017) “Has Globalization Really Increased Business Cycle Synchronization?”

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[#1] Business cycle: Industrial production vs. GDP I

Many good reasons to use Industrial Production (IP) data • Bretton Woods period, no interpolation,... • IP has strong common component that is closely related to GDP [Andreou, Gagliardini, Ghysels, Rubin (2017) - Foerster, Sarte, and Watson (2011)]

Discussion of E. Monnet and D. Puy (2017) “Has Globalization Really Increased Business Cycle Synchronization?”

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[#1] Business cycle: Industrial production vs. GDP II - Official quarterly GDP statistics vs. Industrial Production I

The plots below compare growth rates obtained using GDP and IP series for the

Many good reasons to use Industrial Production (IP) data US and France. These two countries are the only ones to have published official series of period, quarterly GDP statistics since 1950. We find that the series are highly • Bretton Woods no interpolation,... correlated. Over the whole sample period, we find correlations of 0.85 and 0.89 • IP has strong common component that is closely related to GDP for France and the US, respectively. IP series are computed by the authors using [Andreou, Gagliardini, Ghysels, Rubin (2017) - Foerster, Sarte, and Watson (2011)] IMF archives as described in the main text. Historical GDP statistics are taken from the BEA for the US and INSEE for France. Growth rates are computed year

I

on year.

Indeed, IP tracks GDP very closely United States – Full Sample (1950 Q1-2014 Q4)

avr.-09

sept.-12

juin-02

nov.-05

août-95

janv.-99

mai-85

oct.-88

mars-92

juil.-78

Real GDP growth

déc.-81

févr.-75

sept.-71

juin-61

avr.-68

nov.-64

août-54

janv.-58

25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% mars-51

8% 6% 4% 2% 0% -2% -4% -6% -8%

IP growth (right scale)

France – Full Sample (1950 Q1-2014 Q4) NOTE. From Online Appendix of Monnet and D. Puy (2017) ”Has Globalization Really Increased Business Cycle Synchronization?”.

Discussion of E. Monnet and D. Puy (2017) “Has Globalization Really Increased Business Cycle Synchronization?”

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[#1] Business cycle: Industrial production vs. GDP I

Many good reasons to use Industrial Production (IP) data • Bretton Woods period, no interpolation,... • IP has strong common component that is closely related to GDP [Andreou, Gagliardini, Ghysels, Rubin (2017) - Foerster, Sarte, and Watson (2011)]

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Indeed, IP tracks GDP very closely

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Visual inspection is fine... but the important role of IP in the paper calls for a more careful analysis

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UK data • Industrial production, Manufacturing (Source: OECD) • Real GDP (Source: OECD) • Sample period: 1960:Q1 to 2016:Q4

Discussion of E. Monnet and D. Puy (2017) “Has Globalization Really Increased Business Cycle Synchronization?”

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[#1] Business cycle: Industrial production vs. GDP I

IP vs. GDP: year-on-year growth (Corr = 0.8)quarter 0.15 0.1 0.05 0 -0.05 -0.1 -0.15 -0.2 1960

1966

1972

1978

1984

1990

1996

2002

2008

2014

NOTE. UK industrial production and real GDP, year-on-year changes. Source: OECD.

Discussion of E. Monnet and D. Puy (2017) “Has Globalization Really Increased Business Cycle Synchronization?”

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[#1] Business cycle: Industrial production vs. GDP I

IP vs. GDP: year-on-year growth (Corr = 0.8)quarter 0.15 0.1 0.05 0 -0.05 -0.1 -0.15 -0.2 1960

1966

1972

1978

1984

1990

1996

2002

2008

2014

NOTE. UK industrial production and real GDP, year-on-year changes. Source: OECD.

I

Why year on year growth rates? 1. Introduce annoying moving average terms

Discussion of E. Monnet and D. Puy (2017) “Has Globalization Really Increased Business Cycle Synchronization?”

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[#1] Business cycle: Industrial production vs. GDP I

IP vs. GDP: quarter-on-quarter growth (Corr = 0.7) 0.08 0.06 0.04 0.02 0 -0.02 -0.04 -0.06 1960

1966

1972

1978

1984

1990

1996

2002

2008

2014

NOTE. UK industrial production and real GDP, quarter-on-quarter changes. Source: OECD.

I

Why year on year growth rates? 1. Introduce annoying moving average terms 2. Comovement is magnified

Discussion of E. Monnet and D. Puy (2017) “Has Globalization Really Increased Business Cycle Synchronization?”

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[#1] Business cycle: Industrial production vs. GDP I

Correlation between IP and GDP 1

1

0.5

0.5

0

0

Corr(IP,GDP)

-0.5 -0.5 1960 1966 1972 1978 1984 1990 1996 2002 2008 2014 NOTE. 5-year (20 quarters) rolling window correlation between Industrial Production and Real GDP. Source: OECD.

I

Substantial degree of time variation • Very high before ’90s • Downward trend since the ’90s

Discussion of E. Monnet and D. Puy (2017) “Has Globalization Really Increased Business Cycle Synchronization?”

9

[#1] Business cycle: Industrial production vs. GDP I

Correlation between IP and GDP 1

1

0.5

0.5

0

0

Corr(IP,GDP)

-0.5 -0.5 1960 1966 1972 1978 1984 1990 1996 2002 2008 2014 NOTE. 5-year (20 quarters) rolling window correlation between Industrial Production and Real GDP. Source: OECD.

I

Substantial degree of time variation • Very high before ’90s • Downward trend since the ’90s • Spike in the crisis (mechanical, Forbes-Rigobon (2001) - Corsetti et al (2002))

Discussion of E. Monnet and D. Puy (2017) “Has Globalization Really Increased Business Cycle Synchronization?”

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[#1] Business cycle: Industrial production vs. GDP I

Correlation between IP and GDP 1

0.2

0.5

0.15

0

0.1 Corr(IP,GDP) Manufacturing/GDP

-0.5 0.05 1960 1966 1972 1978 1984 1990 1996 2002 2008 2014 NOTE. 5-year (20 quarters) rolling window correlation between Industrial Production (IP) and Real GDP (left axis); share of manufacturing in GDP (right axis). Source: OECD and WB WDI.

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Substantial degree of time variation • Very high before ’90s • Downward trend since the ’90s • Spike in the crisis (mechanical, Forbes-Rigobon (2001) - Corsetti et al (2002)) • Share of manufacturing in GDP correlated with pre-crisis fall in correlation

Discussion of E. Monnet and D. Puy (2017) “Has Globalization Really Increased Business Cycle Synchronization?”

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[#1] Business cycle: Industrial production vs. GDP I

In sum, UK evidence seems to show that IP is a good proxy in the early period, but less so in Great Moderation • Fall in synch during Great Moderation crucial for the results • How much is this due to IP vs. GDP?

Discussion of E. Monnet and D. Puy (2017) “Has Globalization Really Increased Business Cycle Synchronization?”

12

[#1] Business cycle: Industrial production vs. GDP I

In sum, UK evidence seems to show that IP is a good proxy in the early period, but less so in Great Moderation • Fall in synch during Great Moderation crucial for the results • How much is this due to IP vs. GDP?

I

Could use GDP where available and extend it backward with IP data? 1

1

0.8

0.8

0.6

0.6

0.4

0.4

0.2

0.2

0 -0.2

0 Corr(IP,GDP) Corr(GDP extended,GDP)

-0.2

-0.4 -0.4 1960 1966 1972 1978 1984 1990 1996 2002 2008 2014 NOTE. 5-year (20 quarters) rolling window correlation between Industrial Production (IP) and Real GDP; and between real GDP and a synthetic Real GDP series constructed with IP growth rates from 1990 (chosen arbitrarily in this example) to 1960. Source: OECD.

Discussion of E. Monnet and D. Puy (2017) “Has Globalization Really Increased Business Cycle Synchronization?”

12

[#2] Synch: Measurement & Interpretation I

Synchronization (Si ) ≡ Share of variance of industrial production (yit ) explained by global factor

yi,t = βW,i fW,t + βR,i fR,t + εit

⇒ Sit =

β2W,i σ2f

Discussion of E. Monnet and D. Puy (2017) “Has Globalization Really Increased Business Cycle Synchronization?”

W ,t

σ2yi ,t

13

[#2] Synch: Measurement & Interpretation I

Synchronization (Si ) ≡ Share of variance of industrial production (yit ) explained by global factor

yi,t = βW,i fW,t + βR,i fR,t + εit

⇒ Sit =

β2W,i σ2f

W ,t

σ2yi ,t

[a] Theoretical link between financial integration and Sit • Theory has ambiguous predictions about Corr(yi,t , yj,t ) conditional on

idiosyncratic shocks (εit ) 6

IRBC vs. Financial frictions models

Discussion of E. Monnet and D. Puy (2017) “Has Globalization Really Increased Business Cycle Synchronization?”

13

[#2] Synch: Measurement & Interpretation I

Synchronization (Si ) ≡ Share of variance of industrial production (yit ) explained by global factor

yi,t = βW,i fW,t + βR,i fR,t + εit

⇒ Sit =

β2W,i σ2f

W ,t

σ2yi ,t

[a] Theoretical link between financial integration and Sit • Theory has ambiguous predictions about Corr(yi,t , yj,t ) conditional on

idiosyncratic shocks (εit ) 6

IRBC vs. Financial frictions models

• But conditional on common shocks, sign of Corr(yi,t , yj,t ) is not ambiguous 6

(If loadings have same sign, as in the data)

Discussion of E. Monnet and D. Puy (2017) “Has Globalization Really Increased Business Cycle Synchronization?”

13

[#2] Synch: Measurement & Interpretation I

Synchronization (Si ) ≡ Share of variance of industrial production (yit ) explained by global factor

yi,t = βW,i fW,t + βR,i fR,t + εit

⇒ Sit =

β2W,i σ2f

W ,t

σ2yi ,t

[a] Theoretical link between financial integration and Sit • Theory has ambiguous predictions about Corr(yi,t , yj,t ) conditional on

idiosyncratic shocks (εit ) 6

IRBC vs. Financial frictions models

• But conditional on common shocks, sign of Corr(yi,t , yj,t ) is not ambiguous 6

(If loadings have same sign, as in the data)

• What does theory tell us about the impact of Fin Intit on Sit ?

Discussion of E. Monnet and D. Puy (2017) “Has Globalization Really Increased Business Cycle Synchronization?”

13

[#2] Synch: Measurement & Interpretation I

Synchronization (Si ) ≡ Share of variance of industrial production (yit ) explained by global factor

yi,t = βW,i fW,t + βR,i fR,t + εit

⇒ Sit =

β2W,i σ2f

W ,t

σ2yi ,t

[b] Role of regional factors (fR,t ) • During Great Moderation importance of the global factor has fallen, but importance of regional factors has increased [Kose, Otrok, Prasad (2012, IER)] • Overall, share of variance explained by fW,t plus fR,t has remained constant

Discussion of E. Monnet and D. Puy (2017) “Has Globalization Really Increased Business Cycle Synchronization?”

14

[#2] Synch: Measurement & Interpretation I

Synchronization (Si ) ≡ Share of variance of industrial production (yit ) explained by global factor

yi,t = βW,i fW,t + βR,i fR,t + εit

⇒ Sit =

β2W,i σ2f

W ,t

σ2yi ,t

[b] Role of regional factors (fR,t ) • During Great Moderation importance of the global factor has fallen, but importance of regional factors has increased [Kose, Otrok, Prasad (2012, IER)] • Overall, share of variance explained by fW,t plus fR,t has remained constant • Are the regression results robust to Sit =

β2W,i σ2f

W ,t

+ β2R,i σ2f

σ2y ,t i

R ,t

Discussion of E. Monnet and D. Puy (2017) “Has Globalization Really Increased Business Cycle Synchronization?”

?

14

[#2] Synch: Measurement & Interpretation I

Synchronization (Si ) ≡ Share of variance of industrial production (yit ) explained by global factor

yi,t = βW,i fW,t + βR,i fR,t + εit

⇒ Sit =

β2W,i σ2f

W ,t

σ2yi ,t

[c] Role of idiosyncratic shocks (εit ) • Idiosyncratic shocks (εit ) can also lead to synchronized business cycles • After controlling for common factors, Fin Int is positively associated with synch, as measured by growth differentials [Cesa-Bianchi, Imbs, Saleheen (2016)]

Discussion of E. Monnet and D. Puy (2017) “Has Globalization Really Increased Business Cycle Synchronization?”

15

[#2] Synch: Measurement & Interpretation I

Synchronization (Si ) ≡ Share of variance of industrial production (yit ) explained by global factor

yi,t = βW,i fW,t + βR,i fR,t + εit

⇒ Sit =

β2W,i σ2f

W ,t

σ2yi ,t

[c] Role of idiosyncratic shocks (εit ) • Idiosyncratic shocks (εit ) can also lead to synchronized business cycles • After controlling for common factors, Fin Int is positively associated with synch, as measured by growth differentials [Cesa-Bianchi, Imbs, Saleheen (2016)] • Careful in describing results: “Our results suggest that reducing financial

integration [...] would probably increase co-movement in normal times, when the world is dominated by idiosyncratic shocks”

Discussion of E. Monnet and D. Puy (2017) “Has Globalization Really Increased Business Cycle Synchronization?”

15

[#3] Other points

I

Sub-samples are chosen somewhat arbitrarily • Why not estimating a TVP-SV factor model? • Would give many more observations for panel regression

I

India and Pakistan (and to a lesser extent Chile and Mexico) seem too different to be included in the ‘common factor’ analysis • Some robustness dropping these countries?

I

Are global and regional factors enough to clean up for the commonality across countries? Or need more factors? • Could test for idiosyncratic shocks cross-country dependence

Discussion of E. Monnet and D. Puy (2017) “Has Globalization Really Increased Business Cycle Synchronization?”

16

Summing up

I

Nice paper, intriguing results, great data effort • Will be used by many other researchers

I

Open issues • Is industrial production a good proxy for the business cycle after Great

Moderation? • Role of regional factors • Missing link between theory and synch measure

Discussion of E. Monnet and D. Puy (2017) “Has Globalization Really Increased Business Cycle Synchronization?”

17

Discussion of

Has Globalization Really Increased Business Cycle Synchronization? by E. Monnet and D. Puy Ambrogio Cesa-Bianchi (BoE and CfM) First CEBRA-BOE-IFM Annual Meeting

Bank of England – October 19-20, 2017

*The views expressed in this paper do not necessarily reflect the position of the Bank of England.

Has Globalization Really Increased Business Cycle ...

Discussion of. Has Globalization Really Increased. Business Cycle Synchronization? by E. Monnet and D. Puy. Ambrogio Cesa-Bianchi (BoE and CfM). First CEBRA-BOE-IFM Annual Meeting. Bank of England – October - ,. *The views expressed in this paper do not necessarily reect the position of the Bank of England.

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