The sources of fluctuations within and across countries

This paper reviews the evidence on the sources of business cycles within and across countries and the implications for the importance of borders in business cycles. A simple econometric model is presented and applied to within-U.S. and cross-country data in order to provide a framework for interpreting the literature. Using these estimates as a benchmark, data issues, alternative models, and still other approaches to quantifying sources of comovement are surveyed. Overall, the evidence suggests three general conclusions. First, common shocks are less important in international fluctuations than in within-country fluctuations. Second, region-specific shocks account for a larger share of variation in international data than in within-country data. Finally, industry-specific shocks, measured accurately, are a smaller source of variation internationally than within countries. The paper then argues that lowering economic borders among nations through pacts like EMU should make the sources of international fluctuations look somewhat more like the sources of within-country fluctuations, although the effects are uncertain.