International Macroeconomic Interdependence

Dynamic latent variable models, coherences and correlation analysis applied to real and nominal aggregates are used to compare wide sense cyclical interdependence between OECD economies across exchange rate regimes. The results indicate that while there are important domestic components in the fluctuations of national macroeconomic aggregates, international elements have attained greater importance in these fluctuations under flexible exchange rates. The nature of interdependence has shifted toward greater synchronization of national cyclical activity, underscoring the greater incidence of common shocks in an increasingly integrated world economy. Our results are in contrast to the traditional theory of transmission under floating rates, and lend support to the notion that national economic activity is increasingly subjected to an underlying world business cycle, with an overlying domestic cycle.