International evidence on the sources of macroeconomic fluctuations

This paper examines the causes of macroeconomic fluctuations in five economies, Germany, Japan, Sweden, the United Kingdom and the United States using a bivariate VAR model for output and inflation. The results demonstrate that both demand and supply shocks are important sources of business cycle fluctuations. Moreover, at the business cycle frequency there are strong similarities between Germany, the United Kingdom and the United States where more than 50 percent of the forecast error variance in both output and inflation are due to supply shocks. On the other hand, in Japan and Sweden over 90 percent of the error variance in output and less than 20 percent of the error variance of inflation are due to supply shocks.