Business cycle skewness: The role of domestic and international factors

This paper characterizes the second and third central moments of the distribution of the business cycles (BC) across countries and over time. The main hypothesis is that international integration may expose emerging economies to lower variance but higher skewness, Moreover, trade integration, for instance, may exacerbate terms of trade (TOT) shocks in commodity exporting countries and, hence, raise the volatility of business cycles. For this group of countries, policy responses may mitigate the impact of integration on second moments and possibly ameliorate the effect on the third moment of growth distribution. The literature that focuses on higher moments of the business cycles, like skewness, searches for explanations based on financial frictions, labor market frictions or sovereign risk premium as the driver of skewness ((Salgado, S. Guvenen, F. and N. Bloom 2016, Jensen, H., Petrella, I., Ravn, S. and E. Santoro (2017) Jorda, O., Schularick and A. Taylor 2016, Abbritti, M. and S. Fahr, 2013, McKay, A. and R. Reis, 2008., Busch C., Domeij D., Guvenen F. and R. Madera, 2018, Gordon G. and P.A. Guerron-Quintana, 2017, Bianchie, J. 2011.). The contribution of this work is to link international integration with these two moments of the business cycle. More specificly, trade openness in an economy that is not well-diversified may generate some risks; namely, shocks in a small set of prices may have a large effect in the economy. Regarding capital flows, phenomena like sudden stops tend to generate undesired effects on small open economies (Kalemli-Ozcan, Sorensen and Volosovych, 2014, Calvo, 1998 and Mendoza, 2010; Chari, et al. 2005 have a more critical view regarding this relationship).

The skewness of business cycles, measured as the skewness of the growth rate of gross domestic product (GDP) using quarterly data for 70 economies, is explained for domestic factors rather than international factors. Our first estimations show that the skewness of BC are closely related to the standard deviation of the growth rate, financial crisis and the size of the government. Trade openness does not play any role in explaining skewness, while under certain circumstances capital openness has a mild effect on skewness.