Business cycle synchronisation between BRICS and the G5 countrie

Abstract

Abstract The BRICS and G5 groups of countries are currently the most influential economies in the world and in the near future the balance of financial and economic power is predicted to shift from the G5 to the BRICS countries. The study aims to determine the level of business cycle synchronisation between the BRICS and G5 bloc countries during this period of transition. That is to assess the relative responses of these two economies to various macroeconomic shocks. The novel global vector autoregressive (GVAR) model was used to model the interaction of the economies under consideration and simulate the effect of the introduction five different shocks. The following shocks were imposed on the GVAR model; (1) a one standard error positive shock to BRICS’ real GDP; (2) a one standard error positive shock to oil prices; (3) a one standard error positive shock to global inflation; (4) a one standard error negative shock to global equity prices; (5) a one standard error shock to the G5’s nominal short-term interest rates. It was observed that moderate to high levels of business cycle synchronisation exist between the BRICS and G5 countries. It was also found that the response patterns for both groups of countries are generally similar irrespective of the source of the shock. The G5 bloc economy was found to be generally more resilient to economic shocks, that is the intensity of any given shock was found to be higher for the BRICS bloc economy. The results suggest that macroeconomic policy makers can leverage this knowledge to predict business cycles in their jurisdictions by observing relevant synchronised economies and drafting appropriate polices to sustain growth in their economies. The results can be taken with a fair degree of confidence as the GVAR model was found to be stable and containing no unit variables.