Global Macro-Financial Cycles and Spillovers

We develop a new dynamic factor model that allows us to jointly characterize global
macroeconomic and financial cycles and the spillovers between them. The model
decomposes macroeconomic cycles into the part driven by global and country-specific
macro factors and the part driven by spillovers from financial variables. We consider
cycles in macroeconomic aggregates (output, consumption, and investment) and
financial variables (equity and house prices, and interest rates). We find that the global
macro factor plays a major role in explaining G-7 business cycles, but there are also
spillovers from equity and house price shocks onto macroeconomic aggregates. These
spillovers operate mainly through the global macro factor rather than the country-specific
macro factors (i.e., these spillovers affect business cycles in all G-7 economies) and are
stronger in the period leading up to and following the global financial crisis. We find little
evidence of spillovers from macroeconomic cycles to financial cycles.