Downturn Fever
If the U.S. economy sneezes, the old saying goes, the rest of the world catches a cold. But two recent studies suggest that the contemporary impact of a U.S. downturn may be more like global pneumonia. Federal Reserve Bank of Chicago economist Michael Kouparitsas argues that the link between U.S. output and industrial production around ...
If the U.S. economy sneezes, the old saying goes, the rest of the world catches a cold. But two recent studies suggest that the contemporary impact of a U.S. downturn may be more like global pneumonia.
If the U.S. economy sneezes, the old saying goes, the rest of the world catches a cold. But two recent studies suggest that the contemporary impact of a U.S. downturn may be more like global pneumonia.
Federal Reserve Bank of Chicago economist Michael Kouparitsas argues that the link between U.S. output and industrial production around the world — particularly in the Group of Seven (G-7) nations — has grown stronger since the early 1970s, when the Bretton Woods system of fixed exchange rates collapsed. In his essay "Is There a World Business Cycle?" (Chicago Fed Letter, December 2001), Kouparitsas explains that the G-7 economies have always been sensitive to changes in U.S. monetary policy, and that such changes became more frequent and volatile in the post–Bretton Woods world. This volatility, he concludes, "raised the correlation of U.S.–G-7 output fluctuations."
International Monetary Fund (IMF) economists Vivek Arora and Athanasios Vamvakidis go a step further and quantify the global spillovers of U.S. growth. In their article "The Impact of U.S. Economic Growth on the Rest of the World: How Much Does It Matter?" (IMF Working Paper 01/119, August 2001), the authors examine data for 147 countries from 1980 to 1998. They estimate that a 1 percent increase in U.S. economic growth is associated with a 0.8 to 1.0 percent increase in growth for other nations. This impact increased during the 1990s compared with the prior decade, mainly because trade with the United States provided a big boost for developing countries suffering financial crises in 1997–98.
What impact do other major countries and regions have on worldwide growth? For every 1 percent increase in the European Union’s economic growth, other nations experience a 0.7 percentage point increase in growth — smaller than the U.S. impact but still noteworthy. And don’t worry about Japan’s decade-long economic malaise. "Growth in Japan," the authors conclude simply, "does not seem to have a positive impact on growth of other countries."
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