The data set consists of annual time series for the GCC countries, China, Japan, the United States and regional aggregates for Asia and the Euro area. All the series come from the IMF’s World Economic Outlook database and cover the period of 1990-2010, as dictated by the availability of the data. Although business cycle analysis based on higher-frequency data tends to be more robust, providing a wider spectrum of insights, the GCC countries do not publish quarterly national accounts, with the exception of Bahrain since 2008 and Qatar since 2005. There are also no high frequency proxies such as the industrial production index that can be utilized in business cycle analysis.
For the GCC countries, real GDP, real non-hydrocarbon GDP and components of aggregate demand—government consumption and investment spending, private consumption and investment spending, non-hydrocarbon exports, and imports—are used in estimating cyclical patterns and analyzing the extent of comovement. Using the augmented Dickey-Fuller (ADF) unit root test, all the series are found to be non-stationary and integrated of order one.
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The author would like to thank Ahmed Al-Darwish, Joshua Charap, Ayhan Kose, David O. Robinson, Michael Sturm and Fatih Yilmaz for their insightful comments and suggestions. Arthur Ribeiro da Silva and Renas Sidahmed provided excellent research assistance.
The GCC consists of six countries along the Arabian Gulf—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (U.A.E.).
Oil price fluctuations tend to influence the share of hydrocarbon-based and non-hydrocarbon sectors in GDP (i.e. lower oil prices may lead to a higher share of non-hydrocarbon GDP, holding everything else constant). As reported in national accounts, non-hydrocarbon GDP excludes the production of crude oil and natural gas, but includes hydrocarbon-based, energy-intensive manufacturing sectors.
The GCC countries remain committed to monetary integration, but Oman and the U.A.E. have opted out at this stage and the launch of the single currency has been postponed for an unspecified period.
Estrella (2007) provides a comprehensive review and comparative analysis of several commonly applied time- series filters in macroeconomic research.
Since the strength of any relationship does not automatically imply its statistical significance, the significance of the correlation coefficient is tested against the null hypothesis of being zero. In the tables presented in the following section, the pairwise correlation coefficients that are statically significant at the five percent level are highlighted in bold.
For the empirical application of the concordance index, see Artis, Kontolemis, and Osborn (1997), Cashin, McDermott, and Scott (1999), McDermott and Scott (2000), Nadal-De Simone (2002), Avouyi-Dovi and Matheron (2003), and Claessens, Kose, and Terrones (2011).
Although Krugman (1993) notes that trade integration may lead to greater specialization and hence cyclical desynchronization, Frankel and Rose (1998) and Baxter and Kouparitsas (2005) show that countries that have closer trade linkages tend to have more closely synchronized business cycles. Similarly, Clark and van Wincoop (2001) find that states within the U.S. are more closely synchronized than countries within the EU, indicating a greater extent of trade linkages within the U.S. as compared with European countries. Nevertheless, as Kose, Prasad and Terrones (2003) suggest, business cycle oscillations in developing countries tend to be driven by country specific shocks and therefore exhibit a low degree of synchronization with other business cycles.
Using interest rate and equity price data, Espinoza, Prasad and Williams (2010) investigated financial integration in the GCC countries and found evidence of regional convergence and integration.
Bower and Guillemineau (2006) show that the homogenization of fiscal policies has been one of the main determinants of business cycle synchronization in the euro area, while Akin (2006) highlights the significance of common fiscal shocks as a determinant of cyclical convergence in a broader set of countries.
The level of business cycle synchronization—both in terms of GDP and aggregate demand components—among the EU countries has increased steadily in the post-war period and especially after the introduction of the single currency.