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Abstract
Although globalization has shaped the world economy in recent decades, emerging economies have experienced impressive growth compared to developed economies, suggesting a decoupling between developed and emerging business cycles. Using observed developed and emerging economy activity variables, we investigate whether the latter assertion can be supported by observed data. Based on a two-level factor model, we assume these activity variables can be decomposed into a global component, emerging or developed common component and idiosyncratic national shocks. We propose a statistical test for the null hypothesis of a one-level specification, where it is irrelevant to distinguish between emerging and developed latent factors against the two-level alternative. This paper provides a theoretical justification and simulations that document the testing procedure. An application of the test to a panel of developed and emerging countries leads to strong statistical evidence of decoupling.