One Ring to Rule Them All? New Evidence on World Cycles

IMF Working Papers, September 20, 2019

Source details

New quarterly dataset of output, credit and asset prices assembled using IMF archives.
Covers a large set of advanced and emerging economies since 1950.
Variables explicitly studied: output, credit, asset prices (equities and bond yields referenced in keywords).

World cycles, both real and financial, exist.
World cycles are generally driven by US shocks.
The impact of world cycles is modest for most countries.
The global financial cycle is much weaker when measured using credit rather than asset prices.
Synchronization trends differ by variable:
- Prices (goods and assets): synchronization has increased over time.
- Quantities (output and credit): synchronization has not increased over time.
Historical comparison:
- The world business and credit cycles were as strong during Bretton Woods (1950–1972) as during the Globalization period (1984-2006).
For most countries, the way their output co-moves with the rest of the world has changed little over the last 70 years.

US-originated shocks act as primary drivers of observed world cycles.
Asset-price-based measures overstate the strength of the global financial cycle compared with credit-based measures.
The divergence between price synchronization and quantity synchronization implies different transmission mechanisms and possibly differing roles for trade and financial integration over time.

Policy frameworks should account for the modest direct impact of global cycles on most countries, despite strong US influence.
Reliance on asset-price signals alone may misrepresent the true strength of global financial spillovers; credit dynamics warrant specific monitoring.
Given limited change over 70 years in output co-movement for most countries, country-specific structural factors remain important for designing policy responses.

Source: One Ring to Rule Them All? New Evidence on World Cycles, Eric Monnet and Damien Puy, September 20, 2019.