International business cycle spillovers since the 1870s

This article considers the evolution of international business cycle interdependencies among 27 developed and developing countries since the beginning of 1870s, utilizing the generalized vector autoregressive (VAR)-based spillover index of Diebold and Yilmaz (2012), which allows the construction of a time-varying measure of business cycle spillovers. We find that, on average, 65% of the forecast error variance of the 27 countries' business cycle shocks is due to international spillovers. However, the magnitude of international business cycle spillovers varies considerably over time. There is a clear increasing trend since the end of World War II and until the mid-1980s. After that, international business cycle interdependencies declined during the period that was dubbed the Great Moderation and stabilized around the beginning of the twenty-first century. During the Great Recession of 2008-2009, international business cycle spillovers increased to unprecedented levels. Finally, developed countries are consistently ranked as net transmitters of cyclical shocks to developing counties throughout the sample.