Globally Correlated Nominal Fluctuations

Cyclical fluctuations in nominal variables--aggregate price levels and nominal interest rates--are documented to be substantially more synchronized across countries than cyclical fluctuations in real output. A transparent mechanism that can account for this striking feature of the nominal environment is highlighted. It is based on (small) cross-country spillovers of shocks and an interaction between Taylor rules and no-arbitrage conditions. The mechanism is quantitatively important for a wide range of plausible parameterizations and is found to be robust to modifications of the economic environment that help account for other important features of domestic and international aggregate fluctuations.