The role of international factors in the business cycle: A multi-country study

Empirical research has been conducted on the various theories of the business cycle over many countries. However, very little research has attempted to undertake a multi-country disaggregate investigation into the sources of output change. This paper decomposes fluctuations in industry output in a particular country into: (1) a nation-specific shock; (2) an industry-specific shock; (3) a common shock; and (4) an idiosyncratic factor. Using a dynamic factor analysis state-space approach, the paper finds that the industry-specific impulse explains a significant but small part of the variance of the forecast error. This provides limited support for the disaggregated real business cycle paradigm.