Is The United States Still The locomotive Of The World Economy?

Correlations among global business cycles also rise significantly when financial shocks severely impair the world's largest economies through the secondary "spillover" channel. Past U.S. recessions have most adversely affected the broader global economy through two primary links: trade (the United States is the largest importer of foreign goods in the world) and finance (U.S. financial markets are the core of the global financial system). Forbes and Chinn (2003), for instance, show that the performance of the U.S. equity market tends to significantly affect the returns of most global markets, rather than vice versa.

Given the aforementioned changes in the global economic landscape, how sensitive is the global economy to the U.S. business cycle? In an attempt to isolate the causality effects of the secondary "spillover" channel from the high contemporaneous correlations observed through the primary "contagion" channel, we have estimated a growth accelerator model for the global business cycle. Specifically, the model is designed to quantify how much the rest of the world's real GDP growth will given the relative growth-rate differential between the United States and the rest of the world this year. We estimate this model over different time periods and include the BRIC economies as well.

Figure 8 presents the estimated growth accelerator effects for both the U.S. and the BRIC economies over the most recent 20-year period and the previous 20 years. The estimated coefficients in Figure 8 show that the U.S. economy remains the primary driver of world economic growth, although the BRIC economies have clearly emerged as a secondary locomotive. Since 1990, for instance, economic growth in the rest of the world has accelerated on average 0.25% whenever the growth-rate differential between the United States and the rest of the world widened by 1 percentage point the previous year. By comparison, the growth multiplier effect of the BRICs on the rest of the world is currently 0.20%, a notable rise from virtually zero a generation ago.

Taken together, Figures 7 and 8 indicate that emerging market decoupling is unlikely in global financial crises because economic growth in the BRIC economies would have to accelerate significantly to counteract recessions in developed markets. As a result, emerging market economies remain coupled to severe U.S. recessions and global financial crises.

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