What Ties Us Together? Explaining Synchronized GDP Volatility 
Global shocks—such as the 2008 Financial Crisis, the COVID-19 pandemic, and the 2022 commodity price surge—have demonstrated how quickly volatility propagates across borders. Synchronized volatility is particularly harmful, potentially undermining international financial markets’ insurance value, overwhelming multilateral institutions, and hitting the poorest households hardest. Despite extensive literature on volatility levels and business cycle synchronization, there is a significant gap in empirical research on the determinants of synchronized macroeconomic volatility. This paper constructs a time-varying output volatility synchronization index for 42 countries across different world regions over the 1981–2019 period and identifies its robust determinants using Bayesian model averaging alongside complementary methodologies.
Key Findings
- Total factor productivity (TFP) shocks emerge as the most robust determinant of output volatility synchronization across all methodologies, except among developed economies alone. Larger differences in TFP volatility between country pairs are strongly associated with lower synchronization, with effects nearly three times larger among developing countries than in the full sample.
- Macroeconomic policy volatility—fiscal and monetary—robustly determines synchronization globally and exclusively among developed countries but plays no significant role among developing countries. This asymmetry suggests development level critically conditions how volatility shocks propagate internationally.
- Trade openness volatility appears significant globally but not within specific country subsamples. Exchange rate volatility, terms of trade volatility, and financial openness volatility are not robust determinants in any subsample, challenging traditional optimum currency area theory.
Implications
For developing economies, structural convergence in productive capacity and technology adoption is a fundamental precondition for macroeconomic synchronization, suggesting regional integration arrangements should prioritize real-economy convergence over financial or policy coordination. For advanced economies, the significance of monetary and fiscal policy uncertainty implies that volatility shocks propagate predominantly through cyclical factors. Policymakers should recognize that appropriate strategies differ fundamentally by development level: structural transformation and technology transfer for developing countries, policy coordination and framework convergence for advanced economies.
Abstract
Amid heightened policy uncertainty, understanding the drivers of global macroeconomic instability becomes increasingly critical. This paper studies the determinants of output volatility synchronization using data for 42 economies worldwide. We construct a bilateral time-varying index of volatility synchronization and infer its drivers using Bayesian model averaging, complemented by weighted average least squares (WALS) and least absolute shrinkage and selection operator (LASSO) regression. We find that differences in total factor productivity, interest rate, and fiscal policy volatility robustly explain cross-country synchronization, with nuances between developed and developing countries. Overall, the results highlight the role of technological divergence and macroeconomic policy uncertainty in shaping the international co-movement of output volatility.