Measuring world business cycles

Using Kalman filtering and dynamic factor analysis, we decompose aggregate output, consumption, and investment for the G7 countries into factors that are (i) common across all countries and aggregates, (ii) common across aggregates within a country, and (iii) specific to each individual aggregate. In quarterly data for the period 1970 through 1993, fluctuations in all aggregates contain world and country-specific common components that are both statistically significant and quantitatively important. We find that the world and country-specific common components play different roles in different business cycle episodes for each of the seven countries, and that either may be dominant during a particular episode.