International Business Cycles: World, Region, and Country-specific Factors We Would like Thank Mario Crucini and Seminar Participants for Their Comments and Suggestions. the Usual Disclaimer Applies

The paper investigates the common dynamic properties of business cycle fluctuations across countries, regions, and the world. We employ a Bayesian dynamic latent factor model to estimate common components in macroeconomic aggregates (output, consumption and investment) in a sixty-country sample covering seven regions of the world. The results indicate that a common world factor is an important source of volatility for aggregates in most countries, providing evidence for a world business cycle. We find that region-specific factors play only a minor role in explaining fluctuations in economic activity. We also document similarities and differences across regions, countries and aggregates. (JEL F41, E32, C11, C32) Is there a world business cycle? Recent studies have indeed provided evidence that there are many cross-country links in macroeconomic fluctuations. For example, studies of pairwise correlations by David Backus et. al. (1995) and Marianne Baxter (1995) find that business cycles in major industrialized economies are quite similar. Enrique Mendoza (1995) and M. Ayhan Kose (2002) document that business cycles of developing economies have characteristics similar to those of developed countries. More structured time series analyses also find comovement in subsets of countries. In particular, Allan Gregory et. al. (1997) use Kalman filtering and dynamic factor analysis to identify the common fluctuations across macroeconomic aggregates in G7 countries. Todd Clark and Kwanho Shin (2000) use a VAR factor model to study the importance of common and country-specific shocks in accounting for variation in industrial production in European countries. Robin Lumsdaine and Eswar Prasad (2003) develop a weighted aggregation procedure, and examine the correlations between the fluctuations in industrial output in seventeen OECD countries and an estimated common component, and find evidence for a world business cycle and for a European business cycle. What is common to these studies of international business cycles is that they are not studies of the world . Data limitations and econometric intractability have heretofore limited attention to small groups of countries, or to ad hoc world aggregates, and there has not been a detailed study of whether fluctuations are associated with worldwide, regional, or country-specific shocks. We address this and related issues by

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