Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/188904 
Year of Publication: 
2017
Series/Report no.: 
Queen's Economics Department Working Paper No. 1392
Publisher: 
Queen's University, Department of Economics, Kingston (Ontario)
Abstract: 
This paper proposes a statistical test for the decoupling of the comovements in the real activity of developed and emerging economies. Although globalization has shaped the world economy in recent decades, emerging economies such as China have experienced impressive growth compared to developed economies, suggesting a decoupling between developed and emerging business cycles. Using economy activity variables measured by the log differences of the gross domestic product and the industrial production of developed and emerging countries, we investigate whether the latter assertion can be supported by observed data. Based on a two-level factor model, we assume these activity variables can be decomposed into a global component, emerging or developed common component and idiosyncratic national shocks. Furthermore, we propose a statistic that tests the null hypothesis of a one-level specification, where it is irrelevant to distinguish between emerging and developed latent factors against the two-level alternative. This paper provides a theoretical justification and simulation evidence that documents the testing procedure. An application of the test to our panel of developed and emerging countries leads to strong statistical evidence against the null hypothesis of coupling developed and emerging activity factors. Using a sequential principal component method, we identity global, developed and emerging economy activity factors from a two-level factor model. We find that these factors are able to track major economic events since 1996.
Subjects: 
latent factor
decoupling
emerging and developed countries
global economy activity
test statistic
JEL: 
C12
C55
F44
O47
Document Type: 
Working Paper

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