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The myth of decoupling

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Abstract:

The decoupling hypothesis is the idea that business cycles in emerging market economies have become more independent from business cycles in advanced economies in recent years. Decoupling essentially amounts to a structural break in the degree of business cycle interdependence between the two groups of economies, and it can be tested as such. We develop an innovative measure of business cycle interdependence based on the Euclidean distance, available at the annual frequency, which allows for a proper test for a structural break in a graphical setup. We also make use of a standard econometric test. Both approaches point to the same conclusion: there has been no decoupling in recent years. If anything, the degree of business cycle interdependence has become stronger.

Keywords: E32; F15; F36; F41; O47; business cycle; decoupling; emerging markets; globalization; synchronization

Document Type: Research Article

DOI: https://doi.org/10.1080/00036846.2011.577015

Affiliations: Swiss National Bank, Börsenstrasse 15Zürich 8022, Switzerland

Publication date: 2012-09-01

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