Q&A: Seven Questions on Turning Points of the Global Business Cycle

• Author: M. Ayhan Kose - Prakash Loungani - Marco E. Terrones
• Pages: 7-9

7

December 2012

The depth and

breadth of the

worldwide recession

that followed the

2007–09 financial

crisis have led to

intensive discussions about the phases of the global business

cycle—global recessions and global recoveries. The fragile

nature of the ensuing global recovery has added a new twist

to these discussions because of widespread concerns about the

possibility of a double-dip global recession. This article pro-

vides brief answers to seven commonly asked questions about

the global recessions and recoveries.

Question 1: Why do we care about global recessions

and recoveries?

Answer: ere a re at least three main reasons. First, when

a country exper iences an isolated recession, this means it

is subject to an idiosyncrat ic shock. e country can then

implement a range of countercyclical policies , if it has the

policy space, to cope wit h this shock. However, when a

global recession take s place, it means national economies are

experiencing a globa l shock. Such a worldwide shock requires

the coordination of national pol icies to dampen its impact.

Having a good understand ing of the main features of global

recessions can provide a wealth of les sons for the eective

coordination of national policies du ring these episodes.

Second, for surveill ance purposes, it is critical to have a

good understanding of t he nature and intensity of events

surroundi ng global economic uctu ations because national

cycles are tightly l inked to global cycles in a highly i nte-

grated world economy. is is an especially i mportant issue

for the IMF to study since multi lateral surveillance is one

of its main tasks.  ird, in light of the highly synch ronized

and costly nature of globa l recessions, we obviously need to

have a disciplined approach to identify t hese episodes.

Question 2: Despite their importance, there has been a lot

of confusion about the definitions of global recessions and

recoveries. What are the main reasons for this confusion?

Answer: Fi rst, it is not easy to map the simple rules of

identifying n ational recessions, such as two consecutive

quarters of decline i n national GDP, to a global context

simply because most countries do not have reliable qua rterly

GDP series. Second, a recession, by denit ion, implies a

contraction in national GDP, but the global economy rarely

registers a contraction bec ause countries hardly experi-

ence synchronized rece ssions that translate into an outright

decline in world GDP. Given that it is dicult to describe a

global recession, it is also a c hallenging task to have a con-

crete denition of a global recover y.

Question 3: Before getting into the definitions of these

concepts, one obviously needs to identify the turning

points of the global business cycle. What are the best

methods to do that?

Answer: We employ the two stand ard identication meth-

ods of peaks and t roughs of national business cycles. e

rst one is a statistica l method that identies local max i-

mum and minimum va lues of the per capita global GDP

series over a given period of time.  is method implies that a

global recession take s place when the growth rate of the per

capita global GDP is negative. is is obv iously a mechanical

rule based on a single i ndicator of global activity. It is useful

to go beyond this mechanica l rule and consider a broader

denition as it is done at the national level.  is brings us to

our second method, a judgmenta l one.

e judgmental method we employ follows the spirit of

the approach used by the National Bureau of Economic

Research (NBER) and the Center for Economic Policy

Research (CEPR) for the United States and the euro area,

respectively. In particu lar, these institutions date business

cycle peaks and t roughs by looking at a broad set of macro-

economic indicators and reaching a judg ment on whether

a preponderance of the evidence points to a reces sion. We

apply the judgmental approach at the globa l level by looking

at several indicators of globa l activity—real GDP per capita,

industrial product ion, trade, capital ows, oil consumption,

and unemployment.

Question 4: So, how do you define a global recession and

a global recovery?

Answer: e t wo complementary approaches we

described provide an intu itively appealing characteri zation

of turning points of t he global business cycle and translate

Seven Questions on Turning Points of the

Global Business Cycle

M. Ayhan Kose, Prakash Loungani, and Marco E. Terrones

Q&A

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