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Unformatted text preview: 36 Finance & Development June 2008 Business cycles may well be converging among industrial and emerging market economies, but the two groups appear to be decoupling from each other T HE global economic landscape has changed dramatically in recent de-cades. One driving force has been rising economic integration as global trade and nancial linkages have mul-tiplied. In the past two decades alone, the total volume of international trade has more than tripled, and the volume of cross-border nan-cial ows has increased more than ninefold. The second major force has been the ris-ing prominence of emerging market econo-mies. Although the United States remains the worlds largest and most influential economy, the emerging markets have come into their own over the past decade. Based on new data that adjust for differences in the purchasing power of national currencies, the emerging markets as a group account for nearly 40 per-cent of total world output, up from 25 per-cent two decades ago. With their increasing economic clout and faster growth than in the major industrial economies, the emerging markets have become major contributors to world growth. Remarkably, in 2007, Chinas contribution to global GDP growth, mea-sured at market exchange rates, was by itself How Much Decoupling? How Much Converging? M. Ayhan Kose, Christopher Otrok, and Eswar Prasad larger than that of the United States. The emerging markets together accounted for the bulk of global growth over 2000 07 (see Chart 1). These dramatic changes in the world economic order have prompted questions about the relevance of the conventional wisdom that when the U.S. economy sneezes, the rest of the world catches a cold. Indeed, a fierce debate is raging about whether global business cycles are converging or whether emerging markets have managed to decouple from fluctua-tions in U.S. business cycles. The conventional wisdom is coming into question because emerging market growth has continued to be strong despite relatively tepid growth in the United States and a number of industrial countries (see Chart 2). Some observers have even argued that the United States and other industrial countries have themselves become more dependent on demand from the fast-growing emerging markets. There is no doubt that financial markets around the world are closely tied together, and shocks in one part of the global financial system can and often do have large and immediate effects on other parts of the system. But whether the increasing spillovers of financial market shocks really translate into tighter business cycle linkagesthat is, spill-overs in terms of real macroeconomic variables, such as GDPremains an open question. The jury is still out on whether deeper and more interlinked financial markets reduce vulnerabilities on the real side of the world economy or simply serve as a mechanism for magnifying shocks and intensifying their effects. From the point of view of interna-tional macroeconomic and financial stability, this question...
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This note was uploaded on 10/02/2010 for the course INTB 3353 taught by Professor Prodan during the Spring '10 term at University of Houston-Victoria.
- Spring '10