NCPA - National Center for Policy Analysis

Business Cycles No Longer Linked

March 31, 2004

The developed economies of the world are more tightly integrated today than they were 40 years ago. Yet despite efforts to coordinate economic policy, business cycles of richer nations have become less synchronized. That means that while some countries are booming, others are in recession. It also means that domestic policies have a growing importance for the economic performance of developed countries.

Researchers say:

  • Rich economies were more synchronized in the past because they were reacting similarly to international negative economic shocks.
  • International economic shocks have been smaller in the 1980s and 1990s than they were in the 1960s and 1970s and as a result, the individual economies have smaller similar reactions.
  • If future economic shocks are as severe as the ones in the 1960s and 1970s, then the individual economies will become more synchronized again.

Consequently, individual nations have greater freedom to "march to their own drummer." With the international world affecting the business cycle less, For example, the authors state that internal "domestic" shocks are responsible for almost all of Japan's business cycle.

Source: Matthew Davis, "Business Cycles No Longer Linked," National Bureau of Economic Research, NBER Digest, February 2004. Based on: James Stock and Mark Watson, "Understanding Changes in International Business Dynamics," National Bureau of Economic Research, Working Paper, No. 9859, July 2003.

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