Decomposing G7 Business Cycle

In this paper, we have estimated a model that incorporates two key features of business cycles, co-movement among economic variables and switching between regimes of expansion and recession, to aggregate quarterly data for the G7 countries. Two common factors, interpreted as reflecting the permanent and transitory components of the business cycle in the region, and estimates of turning points from one regime to the other were extracted from the data by using the Kalman filter and maximum likelihood estimation approach of Kim(1994). Estimation results confirm a fairly typical stylized fact of business cycles - recessions are steeper and shorter than recoveries, and both co-movement and regime switching are found to be important features of the business cycle in those countries as a whole. The two common factors produce sensible representations of the trend and cycle, and the estimated turning points agree quite well with independently determined chronologies. It also turns out that the degree of synchronization between the G7 and the Korean economy has significantly increased after the Asian currency crisis of 1997.