School of Economics

2010 Discussion Papers

School of Economics Discussion Paper 10/10
December 2010

International Business Cycle Accounting

Keisuke Otsu
University of Kent


This paper extends the business cycle accounting method a la Chari, Kehoe and McGrattan (2007) to a two-country international business cycle model and quantify the effect of the disturbances in relevant markets on the business cycle correlation between Japan and the US over the 1980-2008 period. The main finding is that disturbances in the labor market and production efficiency are important in accounting for the recent increase in the cross-country output correlation. Financial globalization can be the cause of the recent increase in cross-country output correlation if it operated through an increase in the cross-country correlation of disturbances in the labor market and production efficiency, not in the domestic or international capital markets.

JEL Classification: E32, F41

Keywords: Business Cycle Accounting, International Business Cycles, Financial Globalization

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