Exchange rate regimes and international output co-movement

Utilizing Johansen's (1988) multivariate cointegration testing procedure, we find a cointegrating vector between the ouputs of five major industrialized nations for the fixed exchange rate period. However, this relationship breaks down for the flexible exchange rate era. We argue that the breakdown of monetary policy coordination caused by the abandonment of the fixed exchange rates explains the weakening of the international character of business cycles.