CFCM 13/11: Economic Sentiment, International Interdependence and Output Dynamics in the G7

Abstract

Output dynamics in the G7 are characterised using a Global VAR model of countries’ actual outputs and survey-based measures of their expected outputs. A variance decomposition method is applied to examine the importance of global-versus-national effects and of fundamentals-versus-sentiment effects in business cycle fluctuations. The first decomposition highlights the importance of global effects, with global and national effects explaining, on average, 60% and 40% of the persistent movements in countries’ output respectively. Fundamentals dominate in the second decomposition but the analysis finds a substantial role for sentiment which explains 30% of the persistent movements in output on average.

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Authors

Anthony Garratt, Kevin Lee and Kalvinder Shields

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