Common and country-specific fluctuations in productivity, investment, and the current account

Dynamic factor analysis and Kalman filtering are used to construct a measure of common economic activity for the G7 countries. We find that the common fluctuations are strongly associated with movements in US investment. Common fluctuations have substantial impact on fluctuations in both productivity and investment in these countries, but very little impact on the current account. Country-specific investment fluctuations have a significant negative impact on the current account, while country-specific productivity movements have little independent effect. These findings are shown to be generally consistent with the predictions of a multi-country dynamic model calibrated to the empirical decomposition of productivity shocks.