The First Global Recession in Decades

This paper uses monthly data on industrial production to estimate the distribution of international business cycle correlations since the 1980s, with a focus on the current turmoil. The degree of international correlation in national business cycles since the end of 2008 is unprecedented in three decades. Since December 2008, there has been a sizable and significant upward shift in the cross-sectional distribution of cycles synchronization, especially between advanced economies. The magnitude of the shift is unprecedented in recent history, even relative to what happened following 1973 after alternative shocks with worldwide consequences. The shift does not arise because volatilities changed with the crisis. Both goods and assets trade have contributed to this synchronization. The (large and significant) synchronization among OECD economies is associated with financial openness. The (weaker) diffusion among developing economies tends to happen between trade partners. [JEL E32, F15, F36, F41] IMF Economic Review (2010) 58, 327-354. doi:10.1057/imfer.2010.13; published online 5 October 2010