Discussion paper

DP15787 Spillover Effects in International Business Cycles

To analyze the international transmission of business cycle
fluctuations, we propose a new multilevel dynamic factor model with a block structure that (i) does not restrict the factors
to being orthogonal and (ii) mixes data sampled at quarterly and monthly frequencies. By means of Monte Carlo simulations, we show the high performance of the model in computing inferences of the unobserved factors, accounting for the spillover effects, and estimating
the model's parameters. We apply our proposal to data from the G7 economies by analyzing
the responses of national factors to shocks in foreign factors and by quantifying the
changes in national GDP expectations in response to unexpected positive changes in foreign
GDPs. Although the share of the world factor as a source of the international transmission
of fluctuations is still signifi cant, this is partially absorbed by the spillover transmissions. In
addition, we document a pro-cyclical channel of international transmission of output growth
expectations, with the US and UK being the countries that generate the greatest spillovers
and Germany and Japan being the countries that generate the smallest spillovers. Therefore,
policymakers should closely monitor the evolution of foreign business cycle expectations.


Camacho, M, M Pacce and G Pérez Quirós (2021), ‘DP15787 Spillover Effects in International Business Cycles‘, CEPR Discussion Paper No. 15787. CEPR Press, Paris & London. https://cepr.org/publications/dp15787