Global versus Country-Specific Shocks and International Business Cycles

This paper documents the relative importance of global and country-specific shocks for international business cycles. For this purpose, we rely on a symmetric two-country, dynamic, general-equilibrium model with costly, incomplete, international financial markets. We also relate exogenous technologies and government expenditures to unobservable common and idiosynchratic components, and apply a Kalman filter to extract the associated global and country-specific shocks. We show that the baseline parametrization of the model, including all shocks, closely matches the cyclical fluctuations of key macroeconomic variables for the United States and a non-US aggregate over the post-1975 period. We then experiment alternative parametrizations, isolating the effects of each shock, and find that country-specific technology shocks constitute a prime determinant of international business cycles. Also, global technology shocks have marginal contributions, whereas global and country-specific government-expenditure shocks have negligible effects on cyclical fluctuations.