Common and country-specific fluctuations in productivity, investment, and the current account

Dynamic factor analysis and Kalman filtering are used to construct a measur e of common economic activity for the G7 countries. We find that the common fluctuations are strongly associated with movements in US investment. Comm on fluctuations have substantial impact on fluctuations in both productivit y and investment in these countries, but very little impact on the current account. Country-specific investment fluctuations have a significant negati ve impact on the current account, while country-specific productivity movem ents have little independent effect. These findings are shown to be general ly consistent with the predictions of a multi-country dynamic model calibra ted to the empirical decomposition of productivity shocks. (C) 1999 Elsevie r Science B.V. All rights reserved.