Identifying the Common Component of International Economic Fluctuations: A New Approach

In this paper, we develop an aggregation procedure using time--varying weights for constructing the common component of international economic fluctuations. The methodology for deriving time--varying weights is based on some stylised features of the data documented in the paper. The model allows for a unified treatment of cyclical and seasonal fluctuations and also accommodates the dynamic propagation of shocks across countries. We find evidence for a "world business cycle" as well as evidence for a distinct European common component. We also find some evidence that macroeconomic fluctuations have become more closely linked across industrial economies in the period after 1973. Copyright Royal Economic Society 2003.