Global economic cycles show price-quantity decoupling over 70 years
A new 70-year dataset reveals that global economic synchronisation primarily affects asset prices, while real economy variables like GDP and credit remain largely decoupled. This divergence has widened since the global financial crisis, posing challenges for public policy.
Asset markets converge, real economies diverge
The empirical analysis, based on a new quarterly macro-financial dataset covering over 40 countries from 1950 to 2019, reveals a striking divergence.
World cycles explain a significantly larger share of the variance in price variables such as inflation, stock prices, and bond yields compared to real economy variables like GDP and credit growth.
This means asset markets are highly synchronised at the global level, while real economies share a common cycle that explains a much smaller portion of their fluctuations.
This finding challenges the conventional narrative that globalisation uniformly strengthens world cycles across all economic variables, suggesting a more nuanced impact on different sectors of the global economy.
The comprehensive dataset, constructed from International Monetary Fund archives, enables a systematic long-term analysis of these global co-movements.
Financial openness deepens the divide
Tracing synchronisation over time, the study shows that asset price synchronisation has steadily increased since the 1950s, while GDP and credit synchronisation has remained stable or even diminished after the global financial crisis.
During 'normal' times, the world cycle explains less than 20 percent of domestic GDP growth variance in the median country.
The research also examines the role of commercial and financial openness.
Trade integration is associated with a higher contribution of the world cycle to domestic fluctuations in activity and asset prices.
However, greater financial openness leads to stronger co-movement of asset prices with the world financial cycle, but paradoxically, weaker co-movement of real activity with the world economic cycle.
In financially open countries, asset prices align more with global conditions, while GDP becomes less correlated with the world cycle.
Monetary policy in a fragmented world
This price-quantity disconnect challenges conventional policy thinking, particularly for central banks.
Inflation appears increasingly driven by global factors, whereas economic activity remains largely shaped by domestic trends.
This divergence complicates the conduct of monetary policy, as stabilising traditional targets like inflation and the economic cycle means dealing with progressively less correlated forces.
Policymakers must therefore account for whether determining factors are domestic or global when making monetary policy choices.