Co-Fluctuations

This paper provides novel evidence on the determinants of the synchronization in business cycles. I find trade has surprisingly small quantitative effects. On the other hand, pairs of countries with higher aggregate income level experience significantly more synchronized business cycles, and this happens largely because they have similar sectoral production patterns. Geographic considerations do not matter systematically. The results hold for a large sample of countries with very different income levels, as well as within the OECD. They are robust to different filtering devices, across yearly and quarterly frequency and for a variety of data sources. These findings are interpreted in a model where international income disparities correspond to differences in production patterns, and thus to different degrees of exposure to common sectoral stochastic developments.