# 1 Introduction

In the last two decades, emerging market economies played an increasingly important role in the global economy. They constituted more than a quarter of global output and more than half of global output growth during 2010-15, compared with just about one-tenth and one-fifth respectively in the 1990s (Figure 1). The rising importance of emerging markets is also accompanied by their rapid integration into global trade and finance networks. The seven largest emerging market economies– China, Russia, India, Brazil, Turkey, Mexico, and Indonesia– constitute about 80 percent of total emerging market output. This group, which we label as EM7, akin to G7 (the Group of Seven major advanced economies), has also been the main source of growth in emerging markets and their integration into the global economy.<sup>1</sup> In particular, the EM7 economies have strong trade and financial ties with other emerging markets (EM) and frontier markets (FM), especially with those in their respective neighborhoods.<sup>2</sup> Given their size and integration, growth in EM7 could have significant spillovers to other economies in the world.<sup>3</sup> The objective of this paper is to empirically assess the size of these spillovers.

Previous studies on spillovers mostly focus on those originating from advanced economies, including the G7, while spillovers from the emerging markets have received relatively scant attention.<sup>4</sup> This reflects the dominant historical role of the G7 economies in the world economy. However, given the changing economic landscape, understanding spillovers from the EM7 has become increasingly important. Existing work on spillovers from the EM7 is limited, tends to focus on spillovers from individual EM7 economies, and are often conducted with a regional perspective. The literature so far has not presented a systematic analysis comparing individual EM7 economies as sources of spillovers, and comparing spillovers from the EM7 to those originating from the G7. Our paper is the first one that attempts to fill these gaps in the literature.

An extensive literature employs dynamic stochastic general equilibrium (DSGE) models to quantify and elucidate the role of specific shocks in driving business cycles. In particular, some studies have examined the role of domestic and foreign shocks using multi-country DSGE models mostly in the context of advanced economies (e.g. Ambler, Cardia and Zimmermann 2002; De Walque, Smets, and Wouters 2005). While these are useful for understanding spillovers among advanced economies, there is less theoretical work that looks at spillovers between advanced and emerging markets, and within emerging markets (Comin et al. 2014). Specifications and evaluations

> 1 The largest EM economies, i.e. EM7, are identified using 2015 GDP data at market exchange rates. In terms of economic size, the G7 constitutes roughly 80 percent of output in advanced markets (AM) which is also about the share of EM7 in total EM output. The G7 and EM7 are also the major sources of AM and EM integration into the global economy (Figure 1 C and D). We consider these similarities to motivate the EM7 as a group that represents the major EM, as much as the G7 represents the major AM. The G7 and EM7 are also similar to the extent that they are, on aggregate, net-commodity importers, more specifically net-oil importers. For more detailed discussions of the rising importance of emerging markets in the global economy, see Kose and Prasad (2010), Magnus (2011), and Sharma (2012).

> 2 Details of the country classification are provided in Table A1 in the Supplementary Appendix.

> 3 Outside of EM7, the next three largest EM economies — Saudi Arabia, Poland, and Thailand — are relatively small, contributing on average less than 2 percent to EM output (Figure A5 in the Supplementary Appendix). For comparison, the next three largest AM economies outside of the G7 are also relatively small, and their contribution to AM output is quite similar, around 3 percent.

> 4 For the literature on spillovers from advanced economies, see Canova (2005), Gregory, Head and Reynauld (1997), Stock and Watson (2005), Eickmeier (2007), Kose, Otrok and Whiteman (2003), and Diebold and Yilmaz (2015). Inoue, Kaya, and Ohshige (2015) and Ahuja and Nabar (2012) examine spillovers from China, and Alturki, EspinosaBowen, and Ilahi (2009) look at spillovers from Russia.

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