Industrial linkage and clustered regional business cycles in China

This paper applies the common Markov-switching panel data model from Hamilton and Owyang (2012) to study the similarities and differences across China’s provinces with different industrial linkage characteristics in terms of the timing of entering a contraction. This paper first derives the national business cycles, thus finding short-term contractions not well identified in the existing literature. Second, this paper classifies 30 provinces into four clusters based on the input–output linkages between industries to study the similarities and differences across the provincial business cycles. The results of this paper show a few regional business cycles coincide with the nation’s, but most idiosyncratic cluster contractions exhibit differences in timing around the national contractions. The results also find that contractions of some clusters are likely to spread nationwide. Finally, this paper investigates the reasons for business cycle synchronization.