Common trends and common cycles under alternative exchange rate regimes

Abstract

This paper investigates the dynamic interrelationships of economic activity in major economies under the pre- and post-Bretton Woods eras of fixed and flexible exchange rates. A recently developed multivariate method called common trends and common cycles is used to detect the presence of both short- and long-term comovements in monthly industrial production indices of the G7 countries during the period from 1963 to 1993. The empirical results indicate the existence of an international business cycle under both regimes. Further, we show that the comovements in levels and in growth rates of the series have been more important in the pre- 1973 period of fixed rates.