The World Is Not Enough! Small Open Economies and Regional Dependence |
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| Authors: | Knut Are Aastveit Hilde C Bjørnland Leif Anders Thorsrud |
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| Affiliation: | 1. Norges Bank, Oslo, Norway;2. BI Norwegian Business School, Oslo, Norway |
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| Abstract: | 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. |
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| Keywords: | Business cycle synchronization factor model globalization international transmission regionalism C32 E32 F41 |
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