Business Cycles across Space and Time

We study the comovement of international business cycles in a time‐series clustering model with regime switching. We extend the framework of Hamilton and Owyang (2012) to include time‐varying transition probabilities to determine what drives simultaneous business cycle turning points. We find four groups, or “clusters,” of countries that experience idiosyncratic recessions relative to the global cycle. In addition, we find the primary indicators of international recessions to be fluctuations in the term spread, equity markets, and geopolitical risk. In out‐of‐sample forecasting exercises, our model is an improvement over standard benchmark models for forecasting both aggregate output growth and country‐level recessions.