Picci, Lucio
Wo king Pape
In e na ional Business Cycle: Does T ade Ma e ?
Quade ni - Wo king Pape DSE, No. 232
P o ided in Coope a ion wi h:
Uni e si y o Bologna, Depa men o Economics
Sugges ed Ci a ion: Picci, Lucio (1995) : In e na ional Business Cycle: Does T ade Ma e ?, Quade ni
- Wo king Pape DSE, No. 232, Alma Ma e S udio um - Uni e si à di Bologna, Dipa imen o di
Scienze Economiche (DSE), Bologna,
h ps://doi.o g/10.6092/unibo/amsac a/5081
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In e na ional Business Cycle: Does T ade Ma e ?
Lucio Picci1
Sep empbe 1995
J.E.L.: C32, E32, F10
Abs ac .
This pape add esses he ques ion o whe he ade in e dependencies a e signi ican in
explaining he in e na ional synch oniza ion o business cycles, o "in e na ional business
cycles".
Using an econome ic amewo k ha combines he concep o sepa a e coin eg a ion
(G ange an Konishi, 1992) wi h ha o common ea u e analysis (Engle and Kozicki, 1993;
Vahid and Engle, 1993), we a e able o o mula e meaning ul ways o cha ac e izing he links
be ween ade low dynamics and in e na ional ou pu dynamics. We conclude ha ade
in e dependencies do ha e an e ec in explaining he in e na ional business cycle.
1 Dipa imen o di Scienze Economiche, S ada Maggio e 45, I-40125 Bologna.
Tel. +39-51-6402608, Fax. +39-51-6402664, E-mail [email p o ec ed]
1 In oduc ion
Como emen o he ou pu s o di e en economies is a well-es ablished economic s ylized
ac . Ou pu s seem o mo e oge he ac oss coun ies bo h in he long un, possibly because o
he p essu e o con e ge o a common g ow h pa h, and also a business cycle equencies.
Como emen o ou pu is sel -e iden when we conside he momen ous e en s ha ha e
shaped he economic his o y o he las cen u y, such as he c isis o he 30’s, o he oil shocks
o he 70’s. These e en s a ec ed he economic ac i i y i ually in all coun ies.
E en in mo e no mal imes, howe e , business cycles peaks and h oughs end o be oughly
synch onized ac oss coun ies, a phenomenon ha had al eady been no ed in he pionee ing
s udy on he business cycles by Bu ns and Mi chell (1946). E idence o como emen a
business cycle equencies has been ound, among o he s, by Kozicki (1992).
"Economic in eg a ion", loosely de ined, is o en ci ed as he explana ion o his s a e o
a ai s. Economic in eg a ion is a ca ch-all e m, comp ising ade in e dependence,
in eg a ion o he inancial ma ke s, echnological in e dependence, poli ical and e en cul u al
in eg a ion. Wi h a ew excep ions (Dellas, 1986; Cano a and Dellas, 1993), no much
a en ion has been dedica ed o he e o o na owing down he concep o "economic
in eg a ion" o a mo e meaning ul lis o well-de ined ac o s ha ma e o he como emen
o business cycles ac oss coun ies. O en, di e en ac o s ecei e di e en emphasis in
explaining in e na ional ou pu como emen acco ding o he occasion and o he a-p io i
belie s o he w i e .
The old adi ion o he mac oeconome ic modelling o he wo ld economy, o example,
gi es a p ominen ole in he ansmission o he business cycle o ade lows be ween
coun ies (Handbook o In e na ional Economics, 1984; Do nbusch, 1980), wi hin a
amewo k whe e agg ega e ac i i y is la gely de e mined by agg ega e demand.
Today’s in e na ional eal business cycle li e a u e, on he o he hand, ocuses on he
impo ance o shocks ha in pa a e common ac oss coun ies, in some ins ances spill o e
ab oad h ough di usion p ocesses, and in gene al a e ansmi ed ia a ia ions in he
accumula ion pa h o capi al2.
2 Backus, Kehoe and Kydland (1992) expe imen wi h shocks ha a e co ela ed ac oss coun ies and ha spill
o e ab oad. Reynolds (1992), analyzing Solow esiduals as p oxies o he shocks, inds li le e idence o he
p esence o spillo e e ec s. Bax e (1993) concludes ha he in e na ional Real Business Cycles model be e
eplica es eal economies when no spillo e s a e p esen .
1
Di e en iews on why economic ac i i y seems o be synch onized ac oss coun ies ha e
s ikingly di e en economic policy implica ions. I cycles a e common because shocks in
one coun y a e ansmi ed ab oad, o example h ough ade in e dependencies, hen ading
pa ne s ace a p oblem o economic policy coo dina ion. On he o he hand, i common
shocks a e esponsible o he in e na ional business cycle, hen economic policy coo dina ion
would no help.
In conclusion, a be e unde s anding o wha exac ly explains he in e na ional business
cycle, o which a e he aspec s o "economic in eg a ion" ha ma e , would imp o e ou
knowledge o how he in e na ional economy wo ks, and i would allow us o make be e
in o med economic policy ecommenda ions.
This pape ies o assess he ole o ade in e dependencies in de e mining he phenomenon
o he in e na ional business cycle. I does so by means o a s a is ical amewo k ha , by
combining he concep o "sepa a e coin eg a ion" (G ange and Konishi, 1992), wi h he
concep o "common ea u es" (Engle and Kozicki, 1993; Vahid and Engle, 1993), allows us
o sepa a e he " ac o s" ha de ine ou pu om hose ha de ine ade lows, and o inqui e
in o hei mu ual ela ions.
We conclude ha ade in e dependencies do ha e an e ec on he in e na ional business
cycle.
In he nex sec ion, we e iew some p e ious wo k on he subjec , and, in he spi i o ha
wo k, we p esen some addi ional in o mal e idence on he links be ween ade
in e dependencies and he in e na ional business cycle.
Nex , we desc ibe he me hodological aspec s o ou analysis and, a e ha , he esul s o he
empi ical analysis. The conclusions ollow.
2 Some P elimina y E idence
In his sec ion, we b ie ly e iew he esul s o Cano a and Dellas (1993), who use a simple
gene al equilib ium model o analyze he ole o ade in e dependencies in in luencing
in e na ional ou pu como emen . We also p esen some addi ional e idence along hose
lines, and we a gue ha he app oach used by Cano a and Dellas, while possessing an
in ui i e appeal, is subjec o c i icism.
2
Conside wo iden ical coun ies, each inhabi ed by wo ep esen a i e in ini i ely-li ed
indi iduals, and each specialyzing in he p oduc ion o he commodi y , whe e i=1,2
indica es bo h he coun y and he ype o commodi y. A ime , he ou pu o each coun y is
ei he consumed, a home o ab oad, o used as an in e media e inpu o p oduc ion:
whe e C is consump ion, he supe sc ip d, indica es he domes ic and o eign coun y
espec i ely, and , is he amoun o he goods used as in e media e inpu o he
p oduc ion o he consump ion good 1,2.
The ep esen a i e consume in each coun y maximizes expec ed li e ime u ili y, which (in
he home coun y) is gi en by:
whe e is a discoun ac o and is he expec a ion ope a o , subjec o a se o
budge cons ain s and o he echnology:
whe e is a p oduc i i y shock ollowing a s a iona y p ocess.
Cano a and Dellas show ha , i bo h he ins an aneous u ili y and he echnology a e
log-linea :
whe e and ,
hen he solu ion o he consume p og am implies a VAR ep esen a ion o in e na ional
ou pu :
Yi
Yi =Ci
d+Ci
+Xi1 +Xi2
Xi1 Xi2
W=E0∑
=0
∞β U(C1
d,C2
d)
α<β<1E
Y1 +1= (X11 ,X21 ,ρ1 +1) ,
ρ
U(C1 ,U2 )=φ
1lnC1 +φ
2lnC2
Yi +1=lnθi +1+∑
j=1
2αji lnXji , j,i=1,2
∑
j=1
2=α
ij <10 ≤φ
1,φ2≤1
3

o
(1)
whe e , , and a cons an e m has been omi ed o simplici y3.
In his model, como emen s in ou pu occu o wo dis inc easons.
Fi s , he shocks o echnology could be con empo aneuosly co ela ed ac oss coun ies.
Second, idiosinc a ic shocks could be ansmi ed ab oad i he , coe icien s a e non
ze o.
These coe icien s ep esen he echnological dependence o one coun y om he ou pu o
he o he coun y. Obse a ionally, Cano a and Dellas a gue ha hey can be p oxied by he
ade lows be ween coun ies4.
I is hen easy o show ha , o easonable alues o he pa ame e s, and assuming a he
p oduc i i y shocks a e s a iona y, he bigge a e hose wo coe icien s, he highe is,
acco ding o he model, he co ela ion o in e na ional ou pu :
and simila ly o , whe e is he (co) a iance o he p oduc i i y shocks.
Cano a and Dellas es his (and o he ) implica ion(s) o he model by compu ing he
empi ical co ela ion be ween a) he co ela ions o ou pu cyclical componen s and b) he
deg ee o ade in e dependence, measu ed, o each pai o coun ies, as he maximum o he
wo a e age sha es o impo s om coun y j in o al impo s om coun y i, weigh ed by he
coun y’s impo o ou pu a io.
The au ho s do ind a posi i e ela ionship be ween ade and como emen , bu conclude ha
"i s signi icance depend(s) on he de ending p ocedu e employed".



y1 +1
y2 +1


 = 


α11 α21
α21 α22


 


y1
y2


 + 


u1 +1
u2 +1



y +1 = A y + u +1
yi +1=lnYi +1ui +1=lnρi +1
ui +1
α12 α21
∂co (y1 ,y2 )
∂α12 = 11α12(1−α
22)+ 12(1−α
11)(1−α
22)+ 12α21α11 +(1−α
11) 22α21
de (I−A)2 > 0
α21 ij
3 This model is a s aigh o wa d applica ion o he in e na ional economy o he Long and Plosse
(1983) sec o al model. To each sec o in he Long and Plosse model, co esponds he e a coun y.
4 Cano a and Dellas (1993) a gue ha ade o in e media e goods, as opposed o gene al ade, should
be e p oxy his ype o ade in e dependence, bu conclude ha he esul s o hei analysis do no depend on
he choice o a iables.
4
The me hodology used by Cano a and Dellas, while in ui i ely appealing, besides depending
c ucially on he de ending me hod employed, p esen s a ew o he d awbacks. By ocusing
on a e age ade in e dependencies o e a long sample pe iod, i o e looks he sizeable
a ia ions in pai wise ade sha es o e he yea s. These a ia ions could a ec he es ing
p ocedu e i he e ec o gi en ade in e dependencies on he business cycle also changes
h ough ime, as Cano a and Dellas sugges in hei wo k. In o he wo ds, he eason why
Cano a and Dellas do no ind clea -cu esul s is no necessa ily linked o he ambigui y in
he choice o he de ending me hod.
Mo eo e , by assuming ha he ade sha es a e cons an , Cano a and Dellas dis ega d he
possibili y ha ade oo may possess some cyclical beha iou and ha his may be linked
wi h he in e na ional business cycle.
Also, in hei model, he co a iance be ween ou pu s depends posi i ely no only on and
, bu also on he co a iance o he echnological shocks, and . I is possible ha
coun ies a ec ed by mo e simila shocks, also ade mo e. Fo example, indus ialized
coun ies, ha ade hea ily among hemsel es, also ha e mo e simila economic s uc u es,
and as such a e p obably a ec ed by simila shocks. A posi i e co ela ion be ween ou pu
como emen and he in ensi y o ade would no necessa ily imply he p esence o a casual
ela ionship om ade o he in e na ional business cycle.
Maybe mo e impo an , Cano a and Dellas each conclusions abou he sho - un p ope ies
o hei model by assuming, possibly coun e ac ually, a s a iona y p ocess o he
p oduc i i y shocks. On he o he hand, i we assume ha he p oduc i i y shocks ollow a
non-s a iona y I(1) p ocess, hen he implica ions o he model equi e a mo e a icula ed
analysis han ha ca ied ou by Cano a and Dellas. In his case, Engle and Issle (1995), o
he analogous Long and Plosse model, show ha como emen s o ou pu s in he long- un
(coin eg a ion) occu s i and only i he common shocks a e coin eg a ed; como emen s in he
sho - un, o "common cycles" in he Vahid-Engle (1993) sense, occu i and only i he
ma ix in he VAR ep esen a ion o ou pu is o educed ank. Howe e , he de e minan o
is a unc ion o all he pa amen e s o he ma ix, and no s ic ly o he magni ude o i s
o -diagonal elemen s alone, on which Cano a and Dellas base hei analysis.
Wi h in eg a ed d i ing p ocesses, hen, he concep o como emen o ou pu has o be
ede ined. I we do i along he lines o Vahid and Engle hen he model o Cano a and Dellas
does no deli e he implica ions ha he au ho s y o es . The in o mal e idence p esen ed
he e, by explici ly dis inguishing be ween long- and sho - un como emen , would a leas
ake he model mo e se iously.
α12
α21 12 21
A
A
5
In he nex sec ion we de elop a mo e s uc u al s a is ical amewo k ha explici ly models
he a ia ions o he ade lows o e he sample pe iods, and i pe mi s o es o he p esence
o ade cyclical beha io and o assess he ela ionships be ween ou pu and ade cyclical
beha io .
This app oach explici ly dis inguishes be ween long- and sho - un como emen , and does
no depend on o en ambiguous uni a ia e de ending echniques.
3 A VAR Model.
The e a e many cases in economics when di e en g oups o a iables in e ac among
hemsel es di e en ly om he way in which a iables in e ac wi hin each g oup. Conside
o example eal a iables and mone a y a iables. The wo g oups a e, in a way, logically
dis inc ( a iables om di e en g oups a e mo e di e en han a iables wi hin each g oup).
Also, he e a e bo h heo e ical and empi ical easons o belie e ha , while wha happens in
he mone a y sec o has a sho - un in luence on he eal sec o , he long- un beha iou o he
la e is la gely independen om he o me .
In e na ional agg ega e ou pu s and in e na ional ade lows a e a second example.
While he p esence o long- and sho - un ela ionships among hese a iables is ul ima ely an
empi ical ques ion, and in his wo k i will be gi en an empi ical answe , he e a e also
economic easons ha can indica e o us he likely na u e o hese links.
The e a e easons o belie e ha long- un ela ionships among he ou pu s o di e en
economies a e p esen . Be na d and Du lau (1991) a gue ha he neoclassical long- un
con e gence heo y implies ha in e na ional ou pu s a e coin eg a ed. Se e al ou pu s should
hen sha e a single common end, o ha e a coin eg a ing ank equal o he numbe o ou pu s
conside ed less one. Be na d and Du lau (1995), o a numbe o OECD coun ies, ejec he
hypo hesis o con e gence (one common end), bu ind subs an ial coin eg a ion, deno ing
he p esence o "a se o common long- un ac o s which join ly de e mine in e na ional
ou pu g ow h [...]".
The p esence o long- un ela ionships among in e na ional ou pu a iables does no seem o
be linked o he na u e o he ade in e dependencies. To see why, conside again he model
o Cano a and Dellas. As we ha e seen, he coin eg a ing p ope ies o ou pu s depend on he
coin eg a ing p ope ies o he p oduc i i y shocks. This is so ega dless o he s uc u e o he
" " ma ix in he VAR ep esen a ion o ou pu (equa ion 1) o , o he ma e , ega dless o A
6
he exis ence o ade be ween coun ies.
As we ha e a gued, sho - un ela ionships a e also p esen among ou pu s ac oss coun ies.
Bo h common ends and common cycles in in e na ional ou pu , in he Vahid-Engle (1993)
sense, ha e been ound o be p esen by Kozicki (1992).
The e a e also easons why ade lows be ween coun ies should be cha ac e ized by he
p esence o bo h long- and sho - un ela ions. I he ade lows conside ed add-up o o al
wo ld ade, a long un equilib ium is simply gi en by he accoun ing iden i y ha equa es
o al wo ld impo s o o al wo ld expo s. O en, indi idual coun ies a e wo ied by hei
ade imbalances wi h o he indi idual ading pa ne s. The poli ical and diploma ic p essu e
ha ollows such imbalances, i e ec i e, would esul in long- un bila e al ade equilib ium.
In e na ional ade lows, mo eo e , a e subjec o shocks ha a e o a g ea ex en common
ac oss coun ies. Te ms o ade shocks, while a ec ing ade lows asyme ically, a e such an
example. The same can be said o echnological shocks, and o he ade di e sion e ec s ha
ollow he c ea ion o ee ading a eas: in all cases, he ade o many coun ies is a ec ed,
hough o en in di e en ways. These shocks, pe manen o empo a y in na u e, can ha e
bo h pe manen e ec s, as hey cause he ade lows o mo e o a new pa h, o empo a y
"cyclical" e ec s, as he ade lows, a e ha ing been pe u bed, e u n o hei p e ious
pa h.
On he o he hand, s able long- un eal ions be ween ou pu and ade, e en mo e so be ween
ou pu and pai wise ade lows seem o be e y unlikely.
Fi s , echnological ela ions a e no ixed, bu change o e ime as echnological p og ess
akes place, and as inpu subs i u ion occu s because o mo emen s in ela i e p ices.
Mo eo e , excluding maybe impo s o indus ialized coun ies om some oil p oducing
coun ies, bila e al ade includes in gene al a as a ay o (di e en ia ed) p oduc s,
pa icula ly so he ade be ween indus ialized coun ies. No single good, in gene al, is
ep esen a i e o a ade low be ween wo coun ies.
The demand o he goods ha compose a ade low be ween wo coun ies depends on
ela i e p ices, on possibili ies o subs i u ion wi h o he goods p oduced in hi d coun ies,
and on p oduc li e-cycle conside a ions. The obse ed a ia ions o hese de e minan s do no
seem o be compa ible wi h long- un ela ionships be ween indi idual ade lows and
ou pu s.
7
Mo eo e , by using a mo e in o ma i e mul i a ia e end-cycle decomposi ion, unlike in
Cano a and Dellas (1993), he p esen app oach does no depend on ha d- o-in e p e , and
o en con adic o y, uni a ia e end-cycle decomposi ion me hods.
4 Resul s
We ha e analyzed he in e na ional business cycle and he ade links o h ee economies: he
US, Japan, and Eu ope (de ined as he sum o i s ou bigges economies: Ge many, F ance,
I aly, Uni ed Kingdom)7. These h ee economies ep esen a conside able sha e o wo ld
ou pu and hei ecip ocal ade lows a e an impo an pa o o al wo ld ade. Figu e 1 and
2 show, espec i ely, he ou pu and he ade da a.
The ou pu da a a e logged and a cons an p ices, exp essed as index numbe s. The sou ce o
he ou pu da a is IMF-IFS8. The six co esponding pai wise ade lows a e exp essed in
dolla s, logged, and also in index o m. The ade da a ha e been aken om he IMF
"Di ec ions o T ade" (DOT) apes.
The da a a e qua e ly and seasonally adjus ed, and he sample pe iod is om he i s qua e
o 1965 o he second qua e o 1990 (1965.1 - 1990.2), o a o al o 102 obse a ions.
Table 1 shows he esul s o sepa a e coin eg a ion analysis o he wo blocks o a iables9.
Bo h ou pu and ade seem o be linked by one long un ela ion. In he whole VAR sys em
composed by he nine ou pu and ade a iables, once sepa a e coin eg a ion has been
7 The a iables a e: YUS, YJAP, YEU o US, Japanese and Eu opean ou pu ; us jap, useu, japus, japus,
euus, eujap o he six pai wise ade lows (whe e, o example, usjap is US impo s om Japan). The ou pu is
GNP o US, Japan and Ge many; GDP o F ance, I aly and he UK. O he Eu opean coun ies could no be
conside ed because o lack o he necessa y da a.
8 Ou pu o Eu ope is he log o a weigh ed sum o he ou pu o each coun y, exp essed as index
numbe s in local cu ency uni s and a cons an p ices. The weigh s ha e been compu ed as he sha e o each
coun y’s ou pu in he sum o he ou coun ies’ ou pu in he second qua e o 1992 ( he las obse a ion o
he sample), exp essed in dolla s and using he a e age 1992 exchange a e.
9 Two lags o he a iables ha e been conside ed in he E o Co ec ion Model; quali a i e esul s do
no change i h ee lags a e conside ed ins ead. A linea ime end has been included in he EC model. I s
signi icance has been es ed and ound signi ican o ele an dimensions o he coin eg a ion space.
14

imposed, he e a e wo E o Co ec ion e ms. The i s one is a linea combina ion o he
ou pu a iables only; he second e m is a linea combina ion o he ade a iables only.
The wo coin eg a ing ec o s a e epo ed in he le pa o able 4.
As we ha e no ed, while he e a e easons why he a iables we a e conside ing should be
cha ac e ized by sepa a e coin eg a ion, he alidi y o he implied es ic ions is la gely an
empi ical ques ion. G ange and Konishi sugges o es o he alidi y o he es ic ions
imposed by sepa a e coin eg a ion by conside ing he dimension o he whole un es ic ed
sys em, and he sum o he coin eg a ing dimensions unde sepa a e coin eg a ion, and ,
o he wo blocks. This can be done by conside ing he Maximum Eigen alue es , amilia in
coin eg a ion analisys, o he null hypo hesis e sus he al e na i e .
In he p esen case, he alue o he es s a is ic o he null hypo hesis e sus he
al e na i e is equal o 39.685, and well below any con en ional con idence le el
(c i ical alues om Os e wald-Lenum, 1992). The cons ain s implied by he iden i ying
hypo hesis in oduced in he las sec ion and imposed by sepa a e coin eg a ion a e no
ejec ed by he da a.
Table 2 shows he co ela ions o he dis u bances o he ECM ep esen a ion unde sepa a e
coin eg a ion. These co ela ions gi e an indica ion o how common he shocks a ec ing
ou pu and ade a e ac oss coun ies. They a e mode a ely and (mos ly) posi i ely co ela ed
wi hin each block o a iables. In pa icula , co ela ions o he shocks o he wo ade lows
be ween each pai o coun ies a e all posi i e: i a shocks inc eases impo s om one
coun y, on a e age i also inc eases expo s o ha coun y. Since shocks o ou pu a e
posi i ely co ela ed, i a shock causes a pai o economies o do well, ade in bo h di ec ion
will inc ease. We obse e ha pai wise ade co ela ions a e mo e co ela ed be ween, say,
Eu ope and he US, whose ou pu shocks a e highly co ela ed, han be ween Japan and he
US, whose ou pu shocks a e nea ly o hogonal.
The co ela ions o he shocks o he a iables belonging o di e en blocks, on he o he
hand, a e gene ally close o ze o.
Table 3 shows common cycles analysis o he ou pu and o he ade a iables sepa a ely.
The dimension o he co ea u e space is 2 o he ou pu a iables, and 5 o he ade
a iables. The 7 co ea u e ec o s a e shown in he igh pa o able 4.
This implies ha he h ee ou pu s ha e one common cycle and wo common ends, and ha
he ade a iables ha e one common cycle and i e common ends. In his case, hen, he
sho - un beha iou o each block o a iables is desc ibed by one common cycle only.
Rega ding he ou pu a iables, we ha e hus e i ied ha indeed in e na ional ou pu has one
1 2
= 1+ 2 = 1+ 2+1
H0 : =2
H1 : =3
15
"in e na ional business cycle" ha d i es he na ional business cycles. Also, ade lows a e
cha ac e ized by a high deg ee o sho - un common dynamics, which can be summa ized by
only one " ade cycle".
As Vahid and Engle (1993) show, he one common cycle o he ade block, in his case, is
he E o Co ec ion e m o he ade block. Likewise, he one common cycle o he ou pu
a iables is hei E o Co ec ion e m.
The wo cycles a e shown in igu e 3. We no e ha he "in e na ional business cycle" p esen s
he expec ed swings a ound he nega i e wo ld-economy down u ns o he mid-70’s and o
he ea ly 80’s. The " ade cycle" seems o be un ela ed wi h he business cycle. La e on in
his sec ion, we will see how a mo e ca e ul analysis o he ela ions be ween hese wo cycles
can p o ide use ul insigh s on he p oblem.
Table 5 shows F- es s o he inclusion o wo lags o each di e enced a iable in he ECM
ep esen a ion. No e ha in he es equa ions bo h E o Co ec ion e ms a e p esen , and ha
hese a e linea combina ions o he same da a o which we a e es ing signi icance.
T ade lows a e mos ly non-signi ican in explaining ou pu , wi h he excep ion o Japanese
ou pu , which is signi ican ly explained by mos lagged ade lows. US and Japanese ou pu s
a e signi ican in explaining ade lows espec i ely in 3 and 4 cases ou o 6. Lagged
Eu opean ou pu is ne e signi ican . Table 6 shows mo e F and - es s using he ECM
ep esen a ion o he da a. The i s column o he able epo s he P- alues on he join
signi icance o all he lagged ade a iables in he ou pu equa ions ( i s pa om he op),
and o all he lagged ou pu a iables in he ade equa ions (second pa ). Again, no e ha he
wo E o Co ec ion e ms a e included in he es equa ions.
T ade a iables a e join ly signi ican in explaining Japanese ou pu ; ou pu a iables a e
join ly signi ican in explaining 3 o he 6 ade lows.
The second and he hi d columns p esen he P- alues o he - es on he indi idual E o
Co ec ion e ms, while keeping bo h ade and ou pu a iables in he es equa ions. Recall
ha EC1, he E o Co ec ion e m o he ou pu block, is he "in e na ional business cycle",
and EC2 is he " ade cycle".
The ou pu cycle is signi ican o Japanese and o Eu opean ou pu , and no a om being
signi ican , a con en ional signi icance le els, o he US ou pu as well. Mos impo an ,
EC2, he ade cycle, is highly signi ican in explaining all he h ee ou pu a iables. Tha is,
lagged ade a iables a e mos ly non-signi ican in explaining he a ia ions o ou pu , bu
he only s a iona y linea combina ion o ade is. Also, no e ha his implies ha he
16
sho - un dynamics o ade ha e an e ec on he long- un inno a ions o ou pu .
The lagged ade cycle e ec i ely "summa izes" he in o ma ion con ained in he ade da a
ele an o explain ou pu , and he sho - un dynamics o ade do ma e o explain ou pu .
In he ade block he E o Co ec ion e ms a e signi ican in explaining ade lows, hough
no in all cases. In pa icula , he ou pu common cycle, in 5 cases ou o 6, has P- alues
below 15%. Tha is, ou pu sho - un dynamics a e also signi ican in explaining ade lows,
as in ui ion would sugges .
To ge a be e g asp o he dynamic p ope ies o he ou pu and o he ade da a, we conside
hei cons i uen ac o s, no malized o ha e uni a iance o allow o compa ison o he
loading coe icien s.
Table 7 shows hose ac o loading coe icien s. FC1 and FC2 e e o he ou pu and ade
cycle espec i ely; FT1 and FT2 a e he ou pu end ac o s, and FT3 o FT7 a e he ade
end ac o s. Remind ha hese ac o s a e linea combina ions o ei he he ou pu o he
ade a iables. Each a iable is comple ely explained by he ac o s o i s g oup o a iables.
This explains why, in able 7, no all ac o s a e used o explain ou pu o ade a iables.
The ou pu a iables all ha e he same signs on same ac o s, deno ing simila dynamic
beha io . The ade a iables, wi h he excep ion o Eu opean impo s om Japan, a e
cha ac e ized by he same sign on he loading coe icien o hei cyclical common ac o .
This indica es ha he cyclical bea io o ade, besides being ele an , is la gely sha ed by
he di e en ade lows. The mos a ec ed by i seems o be he bila e al ade lows be ween
US and Eu ope.
On he o he hand, ade a iables seem o be cha ac e ized by a g ea e di e si y wi h espec
o hei common end ac o s. Only FT4 is loaded wi h he same sign on all he ade low
a iables.
To be e unde s and he ela ionship be ween ade lows and in e na ional ou pu sho - un
dynamics, we compa e he espec i e common cycles, depic ed in igu e 3.
Fi s , we no e ha hey a e nea ly o hogonal, hei co ela ion being equal o 0.037. In o he
wo ds, he ade cycle, ha we ha e al eady ound o be signi ican in explaining in e na ional
ou pu s, seems o be un ela ed wi h he ou pu cycle. This may be so because he de e minan s
o he in e na ional business cycle and o he ade cycle a e ei he di e en o , while being
common, hey in e ac wi h ade and wi h ou pu in di e en ways.
17
I is in e es ing o y o unde s and whe he di e en ac o s a e linked by causal
ela ionships. The esul s o G ange -causa ion analysis be ween ac o s belonging o di e en
blocks is shown in able 8. Su p isingly, he ou pu cycle does no G ange -cause he ade
cycle a con en ional signi icance le els (e en hough he P- alue o he es is ai ly low),
bu he ade cycle does cause he ou pu cycle. T ade sho - un dynamics a e impo an in
explaining ou pu sho - un dynamics. A possible explana ion o his could be ha some
a iables a ec ou pu h ough hei e ec on ade.
The e is some deg ee o G ange -Causa ion also among he end ac o s. In pa icula , he
wo ou pu end ac o s cause ade end ac o s in ou ins ances, and ade ac o s cause
ou pu ac o s in wo ins ances.
The o e all conclusion is ha ade does ha e an e ec on he in e na ional business cycle.
T ade sho - un dynamics a e impo an in explaining ou pu a ia ions, and hey p o ide
aluable in o ma ion o explain he in e na ional business cycle. The e is also some e idence
o ade long- un dynamics o help explain ou pu long- un mo emne s. No su p isingly, we
also ind ha ou pu ma e s o explain he dynamics o ade.
5 Summa y and conclusions.
Using a s a is ical amewo k ha combines common ea u e analisys wi h he concep o
sepa a e coin eg a ion, we ha e add essed he ques ion o whe he ade in e dependence
ma e s in explaining he in e na ional business cycle.
We ha e done so by means o a s a is ical amewo k ha explici ly models he a ia ions o
bo h ou pu and ade lows, ha sepa a es be ween long- and sho - un in e ac ions o he
da a, and ha easily allows o es ing.
We conclude ha ade ma e s. I ma e s in explaining ou pu , and i ma e s in explaining
he cyclical beha io o ou pu , o "in e na ional business cycle". A pa icula ole in his is
played by he " ade cycle", ha is, by he unique s a iona y combina ion o he ade da a ha
well summa izes hei cyclical beha io .
The ade cycle also summa izes e ec i ely he ole o ade in de e mining ou pu , and i is
signi ican in explaining u u e swings in he in e na ional business cycle.
The econome ic app oach ha we ha e used is qui e gene al. I could be used in o he cases
when he e is an in e es in assessing he ela ionships be ween wo g oups o a iables ha
a e cha ac e ized by sepa a e coin eg a ion, and ha a e linked in he sho - un.
18
6 Re e ences
Backus, D., P. Kehoe and F. Kydland, 1992, In e na ional eal business cycles, Jou nal o
Poli ical Economy 101, 745-775.
Bax e . M., 1995, In e na ional T ade and Business Cycles, Wo king Pape 50125 Na ional
Bu eau o Economic Resea ch.
Be na d, A.B. and S.N. Du lau , 1991, Con e gence o in e na ional ou pu mo emen s,
Wo king Pape 3717, Na ional Bu eau o Resea ch.
Be na d, A.B. and S.N. Du lau , 1995, Con e gence in in e na ional ou pu , Jou nal o
Applied Econome ics, 10, , 97-108.
Be e idge, S. and C.R. Nelson, 1981, A new app oach o decomposi ion o economic ime
se ies in o pe manen and ansi o y componen wi h pa icula a en ion o mesu emen
o he "business cycle", Jou nal o Mone a y Economics 7, 151-174.
Bu ns, A.F., and W.C. Mi chell, 1946, Measu ing business cycles (Na ional Bu eau o
Economic Resea ch, New Yo k, NY).
Cano a, F. and H. Dellas, 1993, T ade in e dependence and he in e na ional business cycle,
Jou nal o In e na ional Economics 34, 23-47.
Dellas, H., 1986, A eal model o he wo ld business cycle, Jou nal o In e na ional Money
and Finance 5, 381-394.
Do nbusch, R., 1980, Open economy mac oeconomics (Basic Books, New Yo k).
Engle, R.F. and C.W.J. G ange , 1987, Coin eg a ion and e o co ec ion: Rep esen a ion,
es ima ion and es ing, Econome ica 55, 251-276.
Engle, R.F. and S. Kozicki, 1993, Tes ing o common ea u es, Jou nal o Business and
Economic S a is ics 11, 369-395, wi h discussions.
G ange , C.W.J., and T.Konishi, 1992, Sepa a ion in coin eg a ed sys ems, Discussion Pape
92-51, Uni e si y o Cali o nia, San Diego, No embe 1992.
Handbook o In e na ional Economics, 1984, ed. by R.W. Jones and P.B. Kenen, (No h
Holland).
Kozicki, S., 1992, Theo y and applica ion o common ea u es, unpublished Ph.D. Thesis
(Uni e si y o Cali o nia, San Diego).
Johansen, S., 1988, S a is ical analysis o coin eg a ing ec o s, Jou nal o Economic
Dynamics and Con ol 12, 231-254.
Long, J.B. and C.I. Plosse , 1983, Real business cycle, Jou nal o Poli ical Economy 91,
39-69.
19

Os e wald-Lenum, M., 1992, A no e wi h quan iles o he asymp o ic dis ibu ion o he
maximum likelihood coin eg a ion ank es s a is ics, Ox o d Bulle in o Economic and
S a is ics 54, 461-472.
Reynolds, P., 1993, In e na ional como emen s in ag ega e p oduc i i y: an empi ical
analysis, manusc ip , Uni e si y o Sou he n Cali o nia, Decembe 1993.
Vahid, F., 1993, Essays on common dynamic ea u es in mul iple ime se ies, unpublished
Ph.D. Thesis (Uni e si y o Cali o nia, San Diego).
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Econome ics 8, 341-360.
20
TABLE 1
COINTEGRATION ANALYSIS:
Johansen’s me hod- Sepa a e Coin eg a ion
Ou pu Block.
T ace Tes S a is ic 1% 5%
C i ical Value C i ical Value
.012 6.40 3.74 2
6.217 23.46 18.17 1
35.928* 40.49 34.55 0
T ade Block.
T ace Tes S a is ic 1% 5%
C i ical Value C i ical Value
.702 6.40 3.74 5
6.14 23.46 18.17 4
22.98 40.49 34.55 3
44.56 61.24 54.64 2
72.26 85.78 77.74 1
116.57** 114.36 104.94 0
**: signi ican a he 1% c i ical le el.
*: signi ican a he 5% c i ical le el.
Sou ce o he c i ical alues: Os e wald-Lenum (1992).
Null hypo heses:
;
H0 : ank Π ≤ s. H1 : ank Π >
21
TABLE 2
CORRELATION BETWEEN INNOVATIONS
ECM ep esen a ion.
YUS YJAP YEU usjap useu japus japeu euus eujap
YUS1--------
YJAP .086 1 -------
YEU .318 .167 1 ------
usjap -.031 -.282 .171 1 -----
useu .139 -.123 .201 .370 1 ----
japus -.074 -.050 .005 .149 -.039 1 - - -
japeu .057 .121 .259 .005 -.097 .356 1 - -
euus -.048 -.079 .197 .170 .429 .205 .058 1 -
eujap .213 .137 .134 .101 .160 .231 .273 .301 1
YUS: US ou pu ;
YJAP: Japanese ou pu ;
YEU: Eu opean ou pu;
usjap: US impo s om Japan;
e c.
22
TABLE 3
CANONICAL CORRELATION ANALYSIS
on he null hypo hesis ha he cu en and all he smalle canonical co ela ions a e
join ly ze o. Res ic ions implied by sepa a e coin eg a ion e ec i e.
Ou pu Block.
Canonical Co ela ions P-Value
.8512 .0002
.7414 .1677
.6099 .6877
T ade Block.
Canonical Co ela ions P-Values
.8505 .0162
.7380 .3818
.7124 .6290
.6651 .8370
.6394 .9232
.4837 .9882
χ2
23