Measuring International Business Cycles by Saving for a Rainy Day

We examine the business cycles of the member countries of the G-7 and Australia based on the cyclical measure considered by Cochrane ( 1994). The measure is motivated by the prediction that the representative consumer changes savings in response to temporary deviations of income from its stochastic trend, while satisfying a long-run budget constraint. We also compare Cochrane's original cyclical measure and an alternative simple saving-based measure and show that they track each other. Our analysis reveals that the extent of international business cycle comovement and the Great Moderation are significantly altered when the saving-based measures are employed in place of commonly used univariate business cycle filters.