Global Interdependence, Decoupling, and Recoupling

Global Interdependence, Decoupling, and Recoupling

Yin-Wong Cheung
Frank Westermann
Copyright Date: 2013
Published by: MIT Press
Pages: 320
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  • Book Info
    Global Interdependence, Decoupling, and Recoupling
    Book Description:

    One lens through which to view global economic interdependence and the spillover of shocks is that of decoupling (and then recoupling). Decoupling between developed and developing countries can be seen in the strong economic performance of China and India relative to that of the United States and Europe in the early 2000s. Recoupling then took place as developing countries sank along with the developed world during the deepening financial crisis of 2008. This volume examines patterns of global economic interdependence and the propagation of shocks in an increasingly integrated world economy.The contributors discuss such topics as the transmission of exogenous shocks; causes of business cycle synchronicity; the differences between global and regional shocks; the South-South trade relationship and its effect on decoupling; vertical specialization and Mexico's manufacturing exports; growth prospects in China, the United States, and Europe after the financial crisis; and the evolving role of the U.S. dollar in international monetary architecture.ContributorsHelge Berger, Rossella Calvi, Yin-Wong Cheung, Gianluca Cubadda, Justino De La Cruz, Filippo di Mauro, Michael Dooley, Eiji Fujii, Linda S. Goldberg, Barbara Guardabascio, Alain Hecq, Hideaki Hirata, Robert B. Koopman, M. Ayhan Kose, Marco J. Lombardi, Steven Lugauer, Nelson C. Mark, Volker Nitsch, Christopher Otrok, Tuomas Antero Peltonen, Gabor Pula, Pierre L. Siklos, Zhi Wang, Shang-Jin Wei, Frank Westermann

    eISBN: 978-0-262-31444-2
    Subjects: Economics

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Series Foreword
    (pp. vii-viii)

    This book is part of the CESifo Seminar Series. The series aims to cover topical policy issues in economics from a largely European perspective. The books in this series are the products of the papers and intensive debates that took place during the seminars hosted by CESifo, an international research network of renowned economists organized jointly by the Center for Economic Studies at Ludwig-Maximilians-Universität, Munich, and the Ifo Institute for Economic Research. All publications in this series have been carefully selected and refereed by members of the CESifo research network....

  4. 1 Introduction
    (pp. 1-16)
    Yin-Wong Cheung and Frank Westermann

    The collapse of the Bretton Woods exchange rate system in 1973 has put the global interdependence and spillovers of shocks across world economies in the limelight. Studies of global interdependence have been conducted on various topics, including business cycle synchronization, policy coordination, financial market spillovers, and contagion. In addition to interactions between developed economies, one theme of these studies is the economic dependence of developing economies on developed ones. This commonly perceived link is illustrated by the aphorism: “When the United States sneezes, the rest of the world catches a cold.”

    The ebb and flow of studies on global interdependence...

  5. I. Measurement Issues
    • 2 Measuring International Spillovers during Economic Expansions and Slowdowns
      (pp. 19-36)
      Marco J. Lombardi, Rossella Calvi and Filippo di Mauro

      There is a long list of studies on international business cycle linkages. Without attempting to be comprehensive, we can distinguish two streams. On the one hand, a number of papers attempt to identify the strength of a global factor affecting economic activity correlations across countries. For instance, Giannone and Reichlin (2006) report evidence of strong co-movement between the gross domestic product (GDP) of United States and the euro area (those members of the European Union that use the euro as their currency), with the US cycle leading the euro area cycle by a few quarters. Kose et al. (2003) find...

    • 3 Building a Synchronous Common-Cycle Index for the European Union
      (pp. 37-52)
      Gianluca Cubadda, Barbara Guardabascio and Alain Hecq

      The European Monetary Union (EMU) has led to an increased interest in investigating convergence issues among business cycles. A standard paradigm used in the literature to describe European business cycle co-movements is the so-called core and periphery scheme (see,inter alia, Beine et al. [2000] and the references therein). In this setting, countries that exhibit a higher degree of synchronization (e.g., Germany, France, Belgium, the Netherlands, and Denmark) are typically situated in a core. The outlying countries (e.g., the United Kingdom, Italy, Spain, Portugal, and Ireland) are situated around this core and represent economies with more particular business cycles.


  6. II. Business Cycles and Growth
    • 4 No Coupling, No Decoupling, Only Mutual Interdependence: Business Cycles in Emerging versus Mature Economies
      (pp. 55-86)
      Pierre L. Siklos

      There is little need to dwell on the apparent success of emerging markets to withstand the worst economic effects from the global financial crisis of 2007–2009. Indeed, as Guillermo Ortiz, former governor of the Banco de Mexico, put it, the crisis was in reality a “North Atlantic Financial Crisis” (Wessel, 2011). While this interpretation may not be entirely accurate, the sentiment at least focuses attention on the mature industrial economies that appear to have suffered most from the events of the past few years. Emerging markets, including those in China, Brazil, and other countries, weathered the downturn in part...

    • 5 Regionalization versus Globalization
      (pp. 87-130)
      Hideaki Hirata, M. Ayhan Kose and Christopher Otrok

      The inexorable forces of globalization and regionalization have reshaped the economic landscape of the world over the past quarter-century. Global trade and financial flows have registered unprecedented growth during this period. Intraregional economic linkages have also become much stronger with the proliferation of regional trade agreements and common currency areas.

      These developments have appeared to affect the evolution of global and regional business cycles in unexpected ways. For example, despite the presence of strong global trade and financial linkages, there was significant variation in growth performance across different regions during the 2008–2009 financial crisis. Specifically, some regions (e.g., Asia)...

    • 6 The Role of Household Saving in the Economic Rise of China
      (pp. 131-152)
      Steven Lugauer and Nelson C. Mark

      In this chapter, we report the results of a small study that compares precautionary saving in China to that in the United States. This is only one of many aspects of household saving in China that has recently received attention from the research community, and household saving itself is only one dimension of the country’s gross national saving. We are looking at a small piece of a very big topic.

      The big picture issue is that despite the recent media and political attention given to Chinese external surpluses, the primary driver of decades of double-digit growth of Chinese aggregate gross...

  7. III. Trade Linkages
    • 7 The Rise of South-South Trade: Does It Mean Less Dependence on the North?
      (pp. 155-168)
      Gabor Pula and Tuomas A. Peltonen

      In the past two decades, the world’s economic geography has changed significantly. In 1990, the share of the South in the world gross domestic product (GDP) was around 20 percent, and it has risen to around 34 percent in 2010.¹ Current International Monetary Fund (IMF) projections state that emerging and developing countries will gain further importance, surpassing the 40 percent threshold by 2015. By 2035, China and India are expected to be two of the world’s three largest economies, with China being the largest. The rise of the South has been accompanied by an impressive increase in its share in...

    • 8 Estimating Foreign Value-Added in Mexico’s Manufacturing Exports
      (pp. 169-212)
      Justino De La Cruz, Robert B. Koopman, Zhi Wang and Shang-Jin Wei

      Mexico’s international trade—exports plus imports of goods—grew from $82.3 billion in 1990 to $553.8 billion in 2007—an increase of 573 percent. This represents, as a percentage of gross domestic product (GDP), an increase from 32.3 percent in 1990 to 55.6 percent in 2007. In comparison, trade in the United States in 2007 was 23 percent of GDP.

      The North American Free Trade Agreement (NAFTA), which took effect on January 1, 1994, played an instrumental role in this development. Total bilateral trade between the United States and Mexico increased by 340.7 percent, from $78.9 billion in 1993—the...

    • 9 On the Persistence of Trade Imbalances: Evidence from Europe
      (pp. 213-232)
      Helge Berger and Volker Nitsch

      The association between exchange rate variability and the speed of current account adjustment is still a matter of much debate. In a now-classic article, Friedman (1953) famously claimed that flexible exchange rates allow the prompt and continuous change of relative prices and thereby facilitate rapid external adjustment. Empirical studies, in contrast, often find no robust relationship between the flexibility of the nominal exchange rate and the rate of current account reversion. In fact, Chinn and Wei (2013) even argue that Friedman’s hypothesis is largely a matter of faith.

      The determinants of current account positions and its dynamics are typically assessed...

  8. IV. The Role of Exchange Rates
    • 10 China, the United States, and Europe after the Great Recession: Has Anything Changed?
      (pp. 235-242)
      Michael Dooley

      The subprime crisis had immediate, widespread, and similar consequences for financial markets throughout the world. In contrast, the real effects have been, and are likely to remain, quite uneven. The United States is recovering slowly from a very deep decline in output and employment. Europe also has considerable slack in utilization rates and faces a long, hard road for resolving their internal imbalances and allocating a large loss from sovereign credits. This road will probably lead to a restructuring of some governments’ debt and a prolonged spell of weak growth and, after the dust settles, an appreciation of the euro....

    • 11 The International Role of the Dollar: Does It Matter If It Changes?
      (pp. 243-262)
      Linda S. Goldberg

      The US dollar is always in the news. This is not surprising, given the role of the United States in the world economy and the role of the dollar in transactions around the world. During the current Great Recession, the strong dollar funding reliance of banks in some markets outside the United States was not viewed as particularly noteworthy until balance sheet funding was disrupted. Some of the news articles speculated on pending changes to the global financial system. As one example, an article in theFinancial Timeson June 28, 2011, titled “Dollar Seen as Losing Global Reserve Status,”...

    • 12 The Penn Effect: Decoupling and Recoupling in the Price-Income Relationship?
      (pp. 263-292)
      Eiji Fujii

      Global interdependence is a multifaceted phenomenon. The process of strengthening and weakening economic linkages between developed countries and developing countries can be manifested in various dimensions. A common approach to documenting it focuses on patterns of shock transmissions and the co-movement of economic variables between the two groups of countries. As an alternative approach, one can also examine behavioral convergence and divergence between the two in a framework of a well-established general economic relationship.

      This chapter contributes to the research on this topic via the second approach. More specifically, I consider the issue of decoupling and recoupling through a window...

  9. Contributors
    (pp. 293-294)
  10. Index
    (pp. 295-308)