Business Cycle Co-Movement Between Africa And Advanced Economies: 1980-2011

Abstract

The decoupling hypothesis has attracted growing research interest since the Global Financial Crisis (GFC). However, there is a lack of evidence on patterns of business cycle co-movement for Africa specifically. This paper fills the gap in the literature by analysing business cycle co-movement between African economies and Advanced Economies (AEs) using annual data which cover the period 1980 to 2011. Although the sample does not allow for a close-up investigation of the crisis years in particular, it does provide an overview of the period before, during and immediately after the GFC. In terms of methodology, a Dynamic Factor Model (DFM) was applied, which includes African and Group of Seven (G7) countries. The empirical analysis divides the African countries into four groups, namely low-income countries, middle-income countries, oil-exporting countries and fragile states. The results show evidence of strong comovement between, on the one hand, the middle-income African countries and the G7, and, on the other hand, the middle-income African countries themselves. The results identify trade linkage as the key driving force behind the co-movement of the business cycle. However, the oil-exporting and low-income African countries exhibit a low co-movement of the business cycle after controlling for common effects from the G7 countries. Interestingly, after the GFC, they decouple from the AEs. Finally, the results do not show signs of comovement with fragile states.

Notes

1 See the International Monetary Fund (2014) for more explanation on the classification.

2 The IMF classifies countries according to their Gross National Income per capita. Additionally, a Resource Allocation Index provides an indication of the structure of the economy. Full information on the classification of Sub-Saharan African economies can be obtained from https://www.imf.org/external/pubs/ft/reo/2015/afr/eng/pdf/statistical1015.pdf.