U.S. Monetary Policy and the Predictability of Global Economic Synchronization Patterns

Abstract

This paper proposes output gap dispersion as a measure of economic synchronization patterns across the world economies. Utilizing a novel, multivariate quantile causality testing methodology and data from a set of 45 advanced and emerging nations, we present evidence of significant causal effects of U.S. monetary policy measures over synchronization patterns across the advanced and emerging economy business cycles, even after controlling for various risk and uncertainty proxies. While U.S. monetary policy actions cause significant interdependence in business cycles across advanced economies, we find that the Fed’s policy decisions also contribute to uncertainty in industrial output patterns. U.S. monetary policy actions are also found to have significant causal effects on the dispersion of emerging market output gaps at low quantiles, suggesting that policy actions by the U.S. Fed drive synchronized economic activity across emerging nations. The findings have significant implications, particularly for policy makers in emerging economies, when it comes to the coordination of their domestic as well as regional monetary policies in response to monetary policy shocks from the U.S.

Keywords: Output gap, Business cycles, Quantile causality, Predictability

JEL Classification: F15, G15, E44