International Business Cycle Co-movements through Time

The increasing integration of the world economy in recent decades, through the liberalisation of trade and capital fl ows, has raised the possibility of a more rapid transmission of business cycle fl uctuations across countries, especially those originating in large economies such as the United States. Indeed, over the past 40 years, the Australian and US business cycles have become highly correlated, a point well documented in the literature and exploited in a number of macroeconomic models for Australia.2 Table 1 shows output correlations between Australia and a number of industrialised economies over the past 40 years.3 It illustrates that the business cycle relationship between Australia and the US is not the only one which has changed over time.