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The World Is Not Enough! Small Open Economies and Regional Dependence
Author(s) -
Aastveit Knut Are,
Bjørnland Hilde C.,
Thorsrud Leif Anders
Publication year - 2016
Publication title -
the scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/sjoe.12126
Subject(s) - economics , business cycle , small open economy , open economy , panel data , variation (astronomy) , dynamic factor , synchronization (alternating current) , world economy , macroeconomics , economy , econometrics , international economics , exchange rate , topology (electrical circuits) , physics , mathematics , combinatorics , astrophysics , political science , law
In this paper, we explicitly introduce regional factors into a global dynamic factor model. We combine new open economy factor models (emphasizing global shocks) with the recent findings of regional importance in the business cycle synchronization literature. The analysis is applied to a large panel of domestic data for four small open economies. We find that global and regional shocks explain roughly 30 and 20 percent, respectively, of the business cycle variation in all countries. While global shocks have most impact on trade variables, regional shocks explain a relatively large share of the variation in cost variables.