Business Cycle Synchronization In BRICS And Its Transmission Mechanism

Business cycle is a common phenomenon in the process of economic growth, the areas on the measurement of the business cycle, characteristics analysis, determinants explore and forecast have always been the focus of the theoretical circle and the decision-making institutions. With the deepening of economic globalization and regional economic cooperation, the study of business cycle also gradually turns from a single economy's independent research to the open study of combined multiple economies. As a new research topic, the international business cycle theory is being more and more concerned.The concept of BRIC was first proposed by Jim O'Neill in 2001, consists of Brazil, Russia, India, China. With the officially join of South Africa in December 2010, the BRIC has changed into BRICS. In recent years, economic recovery in developed countries lacks momentum, but emerging economies keeps a rapid growth. In this background, BRICS economy has achieved outstanding performance, and gains highly attention from the international community. At the same time, BRICS cooperation mechanism is also the distinguishing feature during world economic development. With the establishment of New Development Bank (NDB) and the Contingent Reserve Arrangement (CRA), BRICS has become a new model for multilateral cooperation and a new platform for global economic governance among emerging market. In this background, the study on business cycle synchronization in BRICS not only helps to deepen the understanding of each country's business cycle characteristic, but also has great significance for these five emerging country to counduct policy coordination and to deepen the cooperation mechanism.This paper mainly focuses on the two core issues in the field of international business cycle theory:the measurement of business cycle synchronization and the analysis of its transmission mechanism, and investigates the characteristics of business cycle synchronization in BRICS. Specifically, in view of the lack of an ideal method to measure business cycle synchronization, we attempt to adopt a Scalar-Beek model proposed by Ding and Engle (2001) to improve the limitations of existing methods, and then to measure the business cycle synchronization in BRICS since 1996Q2 from dynamic perspective. Furthermore, this paper adopts a simultaneous equations model adoped by Imbs (2004,2006), and extend it to panel situation, which aims to control potential endogeneity problem and distangle direct effects and indirect effects. Based on these, this paper investigates the transmission mechanism of business cycle synchronization in BRICS meticulously and deeply. Finally, this paper gets the following important conclusions:1. The measurement of business cycle synchronization in BRICS(1)Simple correlation analysis shows that:generally, there is strong co-movement among business cycle fluctuations of BRICS. (2)The results of Scalar-Beek model show that:the business cycle synchronizations between each country are not invariable constant, but with significantly time-varying characteristics. Before 2006, business cycle synchronization maintains a relevant low level, after 2006, business cycle synchronization appears rises firstly and then experiences a big drop. (3)Currently, in addition to Brazil and Russia, India and China, business cycle synchronizations between other countries are very weak, and some countries even reach negative correlations. (4)The business cycle synchronizations between each country have all reached the peak after global financial crisis, this is mainly caused by the negative shocks of financial crisis and the common stimulus policies after crisis. (5) Further investigation on overall business cycle synchronization in BRICS shows that there are both similarities and certain differences between the change pattern of overall synchronization and the change patterns of each country.2. The transmission mechanism of business cycle synchronization in BRICS(1)Generally, each transmission channel has obviously different impact on business cycle synchronization in BRICS, among them, trade intensity and financial integration have significant positive effect on business cycle synchronization in BRICS, specialization and exchange rate volatility have significant negative effect on business cycle synchronization, however, differences in fiscal policy and monetary policy have no significant effect on business cycle synchronization. (2) As there are complicated economic relationships between each transmission channel, a certain transmission channel not only can exert indirect impact on business cycle synchronization, but also can exert indirect impact on business cycle synchronization via other transmission channels. (3)The standard coefficients estimation results show that, the relative importance of each transmission channel is different, among them; trade intensity is the most important determinants of business cycle synchronization, and financial integration is another important transmission chanel of business cycle synchronization, it has a similar impact on business cycle synchronization as trade intensity. Compared with these two channels, the negative effects of specialization and exchange rate volatility are relative finite.Finally, this paper further reveals the rich policy meanings behind these research conclusions.