Co-movement of Australian State Business Cycles

We use a variety of techniques to examine the nature and degree of co-movement among Australian state business cycles. Our results indicate that these cycles move closely together, with particularly strong links between the cycles of the larger states. This finding is robust to a range of statistical measures. We also use an unobserved components model in an attempt to distinguish the sources of this comovement. While our results must be interpreted with caution given the limited amount of data available, they suggest that the major source of cyclical fluctuation in state activity is shocks that are common to all states. Region-specific shocks appear to have a moderate influence on cyclical fluctuations, while spillovers of such shocks from one state to another seem to play only a minor role. These findings are consistent with the results of recent studies for the United States, Canada and Europe, where common shocks have also been found to dominate regional cyclical activity