A Global Account of Volatility and Structural Transformation

This paper investigates the extent to which structural transformation and sectoral volatility contribute to global business cycle fluctuations. The proposed framework provides a forensic account of the “level” and “growth” of global volatility, emphasizing in particular the importance of sectors, geography, the variety of possible linkages, and the importance of structural transformation in the transmission of business cycle fluctuations. The results based on a near universe coverage of the global economy suggest that much of the story behind the milder global business cycle fluctuations that emerged in the post-1984 period revolves around the various linkage-effects. While erratic business cycle fluctuations ascribed to developing economies stand in a sharp contrast with their milder counterparts that originate from developed nations, their contribution to global business cycle fluctuations remains modest. Structural transformation appears to represent the whole story behind the transmission of erratic business cyclical fluctuations from developed to developing economies with Asia emerging as their unique destination. The milder global business cycle fluctuations can be traced to NAFTA and global linkage-effects. The former suggests the presence of an important unbundling of some production stages previously performed in close proximity within developed economies. The latter points to the decline in the relative importance of common international shocks or a difference in the way in which economies react to these shocks.