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Federal Reserve Bank of Chicago

International Business Cycles Under
Fixed and Flexible Exchange Rate
Regimes
Michael A. Kouparitsas

WP 2003-28

International Business Cycles Under Fixed and Flexible
Exchange Rate Regimes
Michael A. Kouparitsas∗
Federal Reserve Bank of Chicago
P.O. Box 834
Chicago IL 60690-0834
mkoup@frbchi.org
Current version: 29 November 2003
Previous version: 30 October 2002
Abstract
This paper studies the changing characteristics of post-war international comovement under fixed
and flexible exchange regimes. I find that business cycle comovement among all the G7
economies was highest in the universally flexible exchange rate era following the collapse of
Bretton Woods (BW) and before the Basle-Nyborg agreement tightened the bands governing the
European Exchange Rate Mechanism (ERM). With the exception of a few examples (Canada/US
and Germany/France) G7 business cycles were far less synchronized in the universally fixed
exchange rate BW era. More recently the ERM period in which continental Europe maintained
fixed exchange rates, is characterized by a high degree of comovement among continental Europe
and the English-speaking G7 countries, with little synchronization across these groups. I find that
these changing patterns of comovement were driven by changes in the propagation of shocks
rather changes in the relative volatility of shocks themselves across these time periods.
JEL Classification: E32, F41, F42, F47.
Key Words: International Business Cycles, Exchange rate regimes, Band-pass filter.

∗

The views expressed herein are those of the author and not necessarily those of the Federal Reserve Bank
of Chicago or the Federal Reserve System.

1

Introduction
In 1999 Europe took the final step in the most ambitious monetary experiment of the postwar

era by establishing a common currency area (the European Monetary Union [EMU]), which is an
extreme form of fixed exchange rate regime where member countries use the same currency.
There is widespread belief, based largely on the Mundell-Flemming model, that countries tied to
a fixed exchange rate regime are more susceptible to foreign disturbances, particularly monetary
disturbances. In other words there is a belief that flexible exchange rates offer greater insulation
from foreign disturbances. A major concern surrounding EMU and fixed exchange rate regimes,
in general, is that business cycles of member countries may become more volatile under a
common currency or fixed exchange rate because they would be subject to not only domestic
shocks but also increased sensitivity to foreign disturbances.
This conventional view of fixed vs. flexible exchange rate regimes stems more from anecdotal
evidence than statistical evidence. Two recent events add to this body of evidence. First, is the
experience of the United Kingdom (UK) and its continental counterparts in the early 1990s.
Member countries of the European Exchange Rate Mechanism (ERM), which stayed tied to the
German mark (DM) after German reunification, such as, France were forced to tighten monetary
policy and suffered a severe and persistent economic downturn. The UK chose to leave the ERM
in 1992 and devalue the pound against the DM rather than raise domestic interest rates to
maintain its currency peg with the DM. Unlike its continental counterparts, the UK experienced a
strong recovery (see Figure 1). Second, severe economic downturns in Mexico in 1994, and Asia
in 1997 came about because of massive capital outflows and banking collapses that flowed from a
currency crisis involving a U.S. dollar exchange rate peg that was inconsistent with the market's
desired level. Looking to the past, monetary historians, like Eichengreen (1992), frequently argue
that countries that abandoned the Gold Exchange Standard experienced an economic downturn
1

that was far less severe than that of countries who stayed pegged to the United States' (U.S.)
during the depression of the 1930s.
One empirical observation that seems to be at odds with this view is the emergence of a
stronger international business cycle in the post-Bretton Woods (PBW), flexible exchange rate
period from 1971 to 1987 (see Table 1). The key stylized fact supporting this is the observed
correlations of industrial output fluctuations of the G7 countries in the PBW period which were
considerably higher than in the Bretton Woods (BW) fixed exchange rate period from 1947 to
1971 and the ERM period from 1987 to 1998.1 This evidence works against the conventional
view of fixed vs. flexible regimes because cross-country correlations of output fluctuations rise if
the importance of foreign shocks rises. Moreover, it questions the insulation properties of flexible
exchange rates over fixed exchange rates. It also suggests that the behavior of international
business cycles maybe intimately related to the exchange rate regime.
This paper is an exploratory analysis of the link between exchange rate regimes and the
behavior of international business cycles. I estimate statistical models of G7 countries over the
three postwar periods: the BW universally fixed exchange rate period BW; the universally
flexible exchange rate period labeled PBW; and subsequent ERM period in which the EMU
countries adopted a fixed exchange rate, while the remaining G7 countries maintained flexible
exchange rates.2 I use these empirical models to get a better sense of the factors underlying the
higher degree of business cycle comovement between G7 nations in the PBW period. There are
essentially two factors that lead to higher correlations of international output fluctuations. First,
was the change due to the nature of shocks affecting the G7 economies? In particular, did the
relative size of innovations affecting output change such that there is rise in the volatility of

1
2

The Group of Seven (G7) countries are Canada, France, Germany, Italy, Japan, UK and U.S.
The EMU countries are France, Germany and Italy.

2

common and foreign disturbances affecting the G7 economies? Second, did the propagation of
these shocks change in a way to produce more similar cycles? More specifically, did the
responses to innovations change so that there was increased sensitivity to foreign disturbances
and/or a change in responses to all disturbances so that they become more alike? My empirical
results suggest that higher output comovement observed in the PBW era was due to fact that the
G7 economies had similar responses to shocks from all sources.
The remainder of this paper proceeds as follows Section 2 discusses the various exchange
rates regimes used by the G7 over the last century. Section 3 describes the changing character of
international business cycles over the periods governed by BW, PBW and the ERM. I review
other approaches to understanding international comovement in section 4. Section 5 describes in
detail this paper’s empirical strategy. The paper’s main findings (details of impulse response
functions, variance decompositions, relative size of structural disturbances across the three
exchange rate periods, and counterfactual simulations) are reported in section 6. Section 7
concludes by summarizing the paper’s main findings.

2

A review of G7 exchange rate regimes

In July 1944, representatives from 44 countries met in Bretton Wood, New Hampshire to draft
and sign the Papers of Agreement that established the International Monetary Fund.3 The system
set up by the BW agreement called for fixed exchange rates against the U.S. dollar and an
unvarying dollar price of gold, of $35 an ounce. Member countries held their official
international reserves in gold or dollar assets and had the right to sell dollars to the Federal
Reserve for gold at the official price. The system was thus a gold exchange standard, with the
dollar as its principal reserve currency.

3

This section draws on material in Krugman and Obstfeld (1994), chapter 19.
3

The earliest sign that BW was near collapse came in early 1968 when central bankers
announced the creation of a two-tier gold market, with one private tier and the other official.
Private traders freely traded on the London gold market and the gold price set there was allowed
to fluctuate. In contrast, central banks would continue to transact with another in the official tier
at the fixed price of $35 dollars an ounce. This came about because of speculation of a rise in the
official gold conversion rate following the devaluation of the British pound in November 1967. A
prime goal of the gold exchange standard was to prevent inflation by tying down gold's dollar
price. By severing the link between the supply of dollars and a fixed market price of gold central
bankers had removed the systems built-in safeguard against inflation.
The U.S. experienced a widening current account deficit in early 1971. This set off a massive
private purchase of the DM as most traders expected a revaluation of the DM against the dollar.
By August of 1971 the markets forced the U.S. to devalue the dollar and suspend gold
convertibility with other central banks. At the Smithsonian agreement in December 1971 the U.S.
dollar was devalued roughly 8 percent against all other currencies. An ever-widening U.S. current
account deficit led to further speculative attacks against the dollar in February of 1973. By March
of 1973 the U.S. dollar was floating against the currencies of Europe and Japan. This marked the
official end of the fixed exchange period for the U.S. Although one could argue that the U.S.
abandoned fixed exchange rates in August of 1971. In response to this my data analysis treats
August 1971 as the end of the BW universally fixed exchange rate period.
While the U.S., Canada and Japan have maintained flexible exchange rates regimes in the
PBW era, European G7 countries have dabbled with various fixed/managed exchange rate
regimes. The first of these regimes was the so-called European Snake in the Tunnel, implemented
in the Spring of 1972, which attempted to keep BW alive by allowing bilateral trading bands for

4

European currencies of ± 1 percent and common trading band of ± 2.25 percent against the U.S.
dollar. This arrangement ended with BW in early 1973.
The second regime grew out of meeting between German Chancellor Helmut Schmidt and
French President Valery Giscard d’ Estaing in 1978. The Exchange Rate Mechanism was created
in 1979 as part of the European Monetary System (EMS). The ERM included Germany, France
and Italy, while all European Community (EC) countries were part of the broader EMS. The UK
by virtue of its EC membership was a member of the EMS, but initially opted out of the ERM.
They joined the ERM arrangement briefly in the early 1990s. Monetary historians divide the
ERM into three periods. The first version ran from 1979 to 1987. All ERM currencies were fixed
to each other, with a band of fluctuations of ± 2.25 percent around bilateral parity (Italy was
allowed a margin of ± 6 percent, in recognition of its higher rate of inflation and political
difficulties). Although this was established as a fixed exchange rate regime, bilateral parities
could with the approval of the EMS be adjusted. Realignments were frequent, leading most
observers to view this as a period of flexible exchange rates. In light of this, I treat the period
following March 1973 to the end of 1986 as universally flexible exchange rate period, since all
industrial countries has moved to flexible exchange systems by this date. I label this era PBW.
The second version of ERM was the result of the Basle-Nyborg agreement and ran from
September 1987 to September 1992. During this period there were infrequent realignments. In
contrast to the earlier regime where member countries attempted to maintain stability with a
basket of EC currencies, under the second ERM regime the DM (the perennial low inflation
currency) became the anchor currency; just as the U.S. dollar had been under BW. In this setting
the Bundesbank was the only ERM member with the freedom to act on its own. The UK joined
the ERM in October 1990, but quickly abandoned it in September 1992 when they found that the
Bundesbank’s stance on monetary policy to be inconsistent with their own fundamentals,

5

returning to a flexible exchange rate regime with the other G7 European countries, which they
still maintain. Italy also abandoned the ERM in September 1992, but returned in November 1996
as a condition of entry to the EMU to which it is a member.
The crisis of 1992 led to the final stanza of the ERM, which ran from 1993 to the introduction
of the EMU in 1999. This was a continuation of the previous regime with wider bands over
which currencies could fluctuate against the DM. Bilateral parties could move by as much as

± 15 percent, suggesting this was little different from a floating exchange rate regime. Although
it is true that the French franc (FF) fluctuated slightly outside its earlier narrow ± 2.25 percent,
suggesting that the French monetary authorities were fully committed to maintaining a fixed
exchange rate with Germany during and after this turbulent period. In light of this, I consider the
period from 1987 to 1998 to be a fixed exchange rate era for the EMU G7 economies, which I
label ERM.
The ERM eventually gave way to the EMU in January 1999, with the introduction of a single
currency across 12 European countries. One of the preconditions to EMU entry was membership
in the ERM. The EMU does not afford Germany any special status as in the second and third eras
of the ERM.

3

International business cycles and exchange rate regimes

There is a wealth of empirical research documenting the changing properties of macroeconomic
time series of the G7 countries over the postwar era. A subset of this literature has focused on the
behavior of international business cycles over various global and regional exchange rate regimes.
The picture that emerges from that emerges from this research is that there has been little
tendency towards increasing international synchronization of cyclical fluctuations across G7
countries, with a marked decline the average coherence of international cyclical fluctuations
occurring over the second half of the 1980s through to the 1990s. The other image developing
6

from this work is that there appears to have been a bifurcation in the mid-1980s. During this
period the English-speaking G7 economies (Canada, the UK and the U.S.) displayed similar
business cycles, while the EMU countries, along with Japan, displayed similar business cycles,
with little to no coherence across these groups over this period.4
This large body of research has focused on gross domestic product (GDP), consumption and
investment data, which limits their analysis to quarterly and in many cases annual data. One of
the drawbacks of this approach is that there are often very few degrees of freedom in exchange
rate sub-periods, such as BW and ERM, which makes it difficult to obtain precise estimates and
make sharp statements about the changing nature of business cycles. I add to this literature by
studying the dynamics of industrial production, which is available on a monthly basis from the
International Monetary Funds, International Financial Statistics. While it is true that the
importance of the industrial sector of G7 economies has been declining over time--which possibly
makes that sector less important in terms of national business cycle dynamics--it should be noted
that the key characteristic of the national business cycles of G7 economies is that there is very
high comovement of all sectors of the economy, so industrial production typically displays the
same cyclical characteristics as GDP (see Christiano and ).
Tables 1 and 2 describe the cyclical behavior of industrial production over the BW, PBW and
ERM periods. Working down Table 1 I highlight the correlation of U.S., German and Japanese
cyclical fluctuations with the other G7 economies. Following the mainstream business cycle
literature I isolate the cyclical fluctuations of industrial production using a band-pass filter (BPF)
that captures frequencies of 18 months to 96 months. I do so using Baxter and King’s (1999)
approximate band-pass methodology, with a moving average of 36 months. In order to avoid

4

See Stock and Watson (2003) for a survey of recent papers documenting international business cycles of
the postwar era.

7

using data from a previous/future sub-period I ignore the first and last 3 years of filtered data for
each sub-period.
Three results emerge from Table 1. First, the PBW era displays a strong G7 business cycle in
which the fluctuations of all seven economies tended to be above or below trend at the same time.
Second, there is no apparent G7 business cycle in the BW era. The only apparent comovement
over this period occurs between the U.S. and Canada, and between Germany, France and the UK.
Finally, this paper adds to the finding that there was a bifurcation in the ERM period, which is
characterized by strong comovement among the English-speaking flexible exchange rate G7
countries (Canada, the UK and the U.S.) and strong comovement among the fixed exchange rate
EMU countries (France, Germany, and Italy) and flexible exchange rate Japan, with no apparent
relationship between these two groups. The point made by these correlation statistics is that there
is no consistent fact describing the behavior of international business cycles and exchange rate
regimes, since we observe strong comovement across pairs of countries under both fixed and
flexible exchange rate regimes. This statement is especially true for the U.S. and Canada, and
France and Germany.
Given the relatively small sample size of the industrial output data it may be the case that the
correlations in the PBW period are driven by one or two influential data points. I explore this
issue in Figures 1 and 2 by plotting the filtered G7 industrial production series over the fixed and
flexible regimes, using the U.S. and Germany, respectively, as the reference cycles. The low
coherence between the U.S. and other G7 economies (excluding Canada) is obvious in the BW
period, the period before the first solid vertical line. Similarly, for the U.S. and EMU countries in
the ERM period, the period after the second solid vertical line. The high correlation in the PBW
period appears to be linked to the 1973-75 period, which coincides with the first oil price shock,
and the 1979-83 period, which coincides with the second oil price shock and the period when the

8

U.S. Federal Reserve experimented with direct targeting of monetary aggregates. While, the
separation in the ERM period, is clearly tied the U.S. slowdown in the early 1990s, which was
echoed by Canada and the UK, and the German post-reunification slowdown which occurred a
little later in the 1990s with obvious spillovers to France and Italy.
As has been noted by a host of researchers (see Stock and Watson (2003) for details) the
volatility of business cycles fell dramatically in the U.S. in the latter part of the 1980s through to
the 1990s. Table 2 reveals that this observation extends to the G7 BPF industrial production data,
with the ERM period percentage standard deviations being no higher than their PBW
counterparts. What is new is that that I find that that with the obvious exception of Germany the
BW period was also characterized by less volatile fluctuations than the PBW era.

4

Approaches to modeling business cycle comovement
One branch of the international finance literature has attempted to explain the international

business cycle through quantitative theoretical models of international trade. So far these models
are real in the sense that there is no role for monetary disturbances. They completely ignore
monetary aspects of the international business cycle by relying wholly on international business
cycle transmission through real routes such as goods and asset trade. In there extensive surveys,
Baxter (1995) and Backus, Kehoe and Kydland (1995) report that models which allow for
realistic trade in capital are unable to generate international comovement. In contrast, less
realistic models that ignore trade in capital goods, such as Stockman and Tesar (1995), have been
shown to generate international comovement. This analysis suggests that monetary or nominal
factors maybe an important component in explaining international business cycles of industrial
countries.
Others have approached the issue by studying international business cycles within the context
of a structural econometric models. Other empirical attempts have relied on cross sectional
9

econometric methods. For example, Canova and Dellas (1993) study the relationship between
trade interdependence and business cycle comovement. They argue that comovement in the PBW
period seems to be due to common shocks rather than changes in the international transmission of
business cycles. There are a range of individual country analyses such as Hutchinson and Walsh
(1992) which studies the U.S.--Japanese business cycles over the fixed and flexible regimes. In
addition to multicountry analysis such as Ahmed et al. (1993) and Bayoumi and Eichengreen
(1994) who study U.S.-aggregate G7 business cycles. A common finding among these studies is
that the nature of underlying disturbances changed over the fixed and flexible period. In
particular, global shocks became more volatile relative to national shocks. There is some
disagreement over whether there was any change in the way the U.S. and G7 responded to these
underlying disturbances when they shifted from fixed to floating rates. Ahmed et al. (1992) argue
that there was no change in the response to shocks under the flexible regime. Hutchinson and
Walsh (1992) and Bayoumi and Eichengreen (1994) argue that there were changes in the
response to shocks in the flexible period. Hutchinson and Walsh find that flexible exchange rates
afforded Japan some additional insulation from foreign disturbances, while Bayoumi and
Eichengreen argue that the shift to flexible exchange rates steepened the aggregate demand curve
of the G7, which tended to make prices (output) more (less) sensitive to supply shocks.

5

Empirical strategy

One way of summarizing interactions among a set of variables is through a structural vector
autoregression (SVAR). There is a wide range of variables one can use in analyzing G7 business
cycles. I extend the analysis of Eichenbaum and Evans (1995) by estimating a series of bilateral
SVARs for the G7. I limit the bilateral pairs to one anchor country (U.S., Germany or Japan) and
one of the remaining six G7 countries. In each case the SVAR includes six endogenous variables:

10

log levels of the anchor country’s ( yt ) and G7 partners industrial production ( yt* ); anchor
country’s CPI inflation level ( π t ); the inflation differential between the G7 partner and anchor
country ( π t* − π t ); anchor country nominal short-term interest rate ( rt ); and nominal short term
interest differential between the anchor country and G7 partner ( rt* − rt ). This variable list
extends Eichenbaum and Evans’ analysis by adding a variable for the G7 partners’ industrial
production and by studying more than U.S.-G7 country pairs.
One of the challenges facing researchers is the limited degrees of freedom over the BW and
ERM periods, since these periods are restricted to samples of 12 or less years. Following
Eichenbaum and Evans, I overcome the data limitation by using monthly data, and limiting the
lag length of the estimates vector auto regressions (VAR) to six months.5 This yields the
following model focusing on the dynamic behavior of a 6 × 1 vector,

Z t = [ yt , yt* , π t , π t* − π t , rt , rt* − rt ]'
where the dynamics of Zt are represented by a VAR,

Z t = Φ i ( L) Z t −1 + ε t

(1)

where Φ i ( L) is a 6 × 6 matrix of polynomials in the lag operator L ; and

ε t = [ε yt , ε y t , ε π t , ε π
*

*

−π t

, ε rt , ε r* − rt ] is a 6 × 1 vector of disturbances assumed to be serially

uncorrelated, with covariance matrix Σi . I estimate this model over three independent time
periods, Bretton Woods {Φ BW , Σ BW } are estimated using data from t ∈ [1958M 1,1971M 6] ,
post-Bretton Woods {Φ PBW , Σ PBW } are estimated using data from t ∈ [1973M 1,1985M 12] and

5

Varying the length of the VAR had no appreciable effect on the results reported in this paper.
11

Exchange Rate Mechanism {Φ ERM , Σ ERM } are estimated using data from

t ∈ [1987 M 6,1998M 12] .6
Before I can shed light on the issue of whether increased comovement in national output
occurred because of changes in the relative volatility of international versus national disturbances
and/or changes in the response to international and national disturbances I need to impose some
structure on the system of equations described by (1). There are numerous forms of indentifying
restrictions in the literature. In their work on Japan, Hutchinson and Walsh (1992) impose longrun restrictions on the data. Identification in Ahmed et al. (1993) and Bayoumi and Eichengreen
(1994) comes from different theoretical models. I use a recursive structure popularized by Sims
(1972). This approach imposes restrictions on the covariance matrix of the disturbances of the
model. In particular, structural disturbances are identified by imposing a recursive information
ordering. Throughout the analysis I impose the following information ordering: anchor industrial
production; G7 partner industrial production; anchor inflation, G7-anchor inflation differential,
anchor nominal interest rate, G7-anchor interest differential. One interpretation of this approach is
that the anchor country’s monetary authority first chooses the value of the monetary instrument
(in this case the anchor country’s short-term interest rate) after observing contemporaneous
movements in anchor country output, G7 partner output, anchor country inflation and the
inflation differential between the anchor and G7 partner. The G7 partner then reacts to the anchor
country’s monetary policy with a lag of one period by choosing the value of its monetary

6

The U.S., Canadian and Japanese models are estimated over 1958M1 to 1998M12, the German, French,
and Italian models are estimated over 1960M1 to 1998M12, and the UK models are estimated over
1964M1 to 1998M12. The limiting factor in these datasets is the availability of consistent short-term
interest rate data. See appendix A for details.
12

instrument (in his case its short term interest rate) after observing the anchor country’s reaction to
all other variables in the international economy.7
I implement this approach by assuming that the fundamental exogenous process that drives the
economy is a 6 × 1 vector process ut of orthogonal serially-uncorrelated shocks, with a diagonal
covariance matrix Di . The VAR disturbance vector ε t is assumed to be a linear function of a
vector ut of underlying economic shocks, as follows,

ε t = Au
i t , for i = {BW , PBW , ERM } .
The recursive information structure implies that Ai is the unique lower-triangular matrix with
ones along the diagonal, which is recovered from the covariance matrix Σi ,

Σi = Ai Di Ai ' , for i = {BW , PBW , ERM } .
With these models in hand I can isolate can explore whether higher degree of business
comovement between the G7 nations in the PBW period is due to a change in the relative
volatility of fundamental disturbances or a change in the propagation of these disturbances.
Assessing changes in volatility of structural disturbances across the three periods is simply a
matter of comparing estimates of the diagonal elements of DBW , DPBW , and DERM . While
isolating changes in the propagation of fundamental shocks is done by comparing the shapes of
the model’s impulse response functions across the BW, PBW, and ERM time periods. I also
highlight the degree of similarity of these propagation mechanisms by comparing the shape of the
anchor and G7 partner country’s industrial production responses to a given fundamental shock.
Finally, I isolate the importance changes in the relative volatility of shocks and propagation
process in explaining changes in G7 output comovement through a series of counterfactual
7

It is important to note that the results reported in this paper are robust to different recursive orderings. In
particular, ordering the G7-partner ahead of the anchor country yields identical results.
13

experiments. First, to assess the whether changes in the relative volatility of shocks are important
I simulate the models estimated in the BW and ERM periods under the assumption that the
volatility of shocks was the same as in the PBW era, and then compare the implied business cycle
correlations of industrial output with the actual estimates for the BW and ERM periods.8 If the
counterfactual correlation coefficients are larger than the actual BW or ERM correlations I take
this is as evidence in favor of the hypothesis that changes in the volatility of disturbances
underlies the higher G7 correlations in the PBW era. Second, I conduct the reverse experiment by
simulating the PBW model under the assumption that the volatility of the fundamental
disturbances is the same as the BW and ERM periods and compare the simulated business cycle
correlation coefficients of industrial output with the actual correlations from the PBW era to see if
there is evidence in favor of the hypothesis that changes in the volatility of disturbances underlies
the higher G7 correlations in the PBW era. Lastly, I also compare this second set counterfactual
business cycle correlations with actual business cycle correlations of industrial production from
the BW and ERM periods to see if there is evidence in favor of the hypothesis that changes in the
propagation of shocks underlie the higher G7 correlations in the PBW era, since higher
counterfactual correlations would imply that changes in the propagation of shocks are the source
of the higher PBW correlation coefficients.

6

Results

This section reports on various characteristics of the estimated bilateral VARs. I begin by
providing a structural interpretation of the identified fundamental shocks. Then move on to a
discussion of the relative importance of international and national shocks affecting the G7
economies across the three exchange rate eras. This leads me to analysis of the changing relative
8

I generate business cycle statistics for the simulated VARs data that is comparable with the band-pass
filtered data reported in Tables 1 and 2 by applying standard spectral techniques to the estimated time series

14

volatility of international and national shocks. I change gears by examining the similarity of
responses to shocks and finish up the section with the series of counterfactual experiments
described in the previous section.
6.1

A structural interpretation of a typical bilateral VAR

I begin my discussion of the estimated models by tracing through the impulse responses of the
U.S.-German model estimated over the PBW era, with a view to ascribing a structural
interpretation to the identified fundamental shocks. Figure 3 traces out the U.S. and German
responses to a shock to U.S. industrial production. This shock has a temporary positive effect on
U.S. and German output, U.S. inflation, the U.S. interest rate and a negative effect on the inflation
and interest differential of the Germany and the U.S. I interpret this to be a U.S. demand shock.
Turning to Figure 4, we see that the shock to German industrial production has a similar effect on
the remaining variables of the system as did the U.S. demand shock, which leads me to interpret
this as a German demand shock. Figure 5 traces out the responses to a positive U.S. inflation
shock. The only significant response to this shock appear to be a negative output response in the
U.S. and Germany, which suggest that this is a U.S. supply shock. Responses following a shock
to the German-U.S. inflation differential also have a negative effect on U.S. and German
industrial production albeit much weaker then the U.S. inflation, which suggests that this could be
interpreted as a German supply shock. Figure 7 reveals the responses to a U.S. interest rate shock.
Higher U.S. interest rates lead to a temporary fall in U.S. and German output with a lag of about
one to two years. This shock also has a negative effect on the German-U.S. inflation differential,
but it is far less persistent than the shock to U.S. interest rates which suggests that the German
interest rate responds with a lag of about three months to a U.S. interest rate shock. The most
obvious structural interpretation of this innovation is that it is a U.S. monetary policy shock.

models to get a covariance matrix for industrial output at business cycle frequencies.
15

Shocks to the German-U.S. interest differential yield similar output responses to the U.S. interest
rate shock. U.S. interest rates are estimated to respond with a similar lag as German rates to U.S.
interest rate shocks of about three months. I interpret these innovations as being German
monetary policy shocks.
6.2

Did the relative importance of international and national disturbances change?

Tables 3 to 5 report the relative importance of these six sources of disturbance across the three
exchange rate periods for 14 bilateral pairs. Each panel describes the percentage share of the nstep ahead variation in anchor and G7 partner country industrial production attributable to the six
structural disturbances (for n=3, 6, 12, 24, 36, and 60 months). I also report the share of the
variance of industrial output at business cycle frequencies that is explained by the six
fundamental innovations in the row labeled BCF.
These tables reveal that relative importance of the six disturbances to the G7 economies
changed over the three exchange rate regimes, but not in a homogenous way. The most notable
common change was the rise in the relative importance of own output shocks for the EMU
countries and Japan in the ERM period. For example, the bottom panel of Table 3 shows that in
the U.S.-German model, the German industrial production shock accounted for 88 percent of the
variation in German industrial production at business cycle frequencies during the ERM period
and less than 50 percent in the BW and PBW eras. This suggests that these countries were subject
to shocks that were more idiosyncratic than in the past.
Before leaving these tables I make a final note in comparing the six bilateral models involving
the U.S., Germany and Japan. These panels reveal that the variance decompositions at business
cycle frequencies are invariant to the ordering of the anchor and G7 country.

16

6.3

Did the relative volatility of international and national shocks change?

Tables 6 to 8 report on the changing character of structural disturbances over the various
exchange rate periods for 14 bilateral country models. Each row of a panel reports the percentage
standard deviation of the six structural disturbances for a given exchange rate era. The bot two
rows of the panel report the ratio of these standard deviations, with the PBW statistic in the
denominator.
As has been noted by Stock and Watson (2003) and a host of other papers using different
identification strategies, the volatility of shocks to G7 economies declined significantly from the
PBW to the ERM period. My estimates add to this finding. Tables 6 to 8 reveal that with a few
exceptions the percentage standard deviations of all structural disturbances from the 14 bilateral
G7 models in the ERM period were significantly smaller than their counterparts in the PBW era.
The exceptions are Japanese industrial production shocks, German inflation shocks, and Italian
interest differentials. Although higher than their ERM analogs, structural disturbances in the BW
era also appear to be less volatile than counterparts in the PBW period.
One possible explanation for the higher business cycle comovement in the PBW era was that
the volatility of international shocks rose relative to national shocks. In most cases the decline in
the volatility of structural shocks attributable to the anchor country and the G7 partner were fairly
uniform, which suggests that the changing character of business cycle comovement cannot be
explained by a shift in the relative volatility of disturbances affecting the G7 economies.
6.4

Were responses to national and international shocks more alike in PBW?

Figures 9 to 21 consider another avenue of change in the G7 economies. They reveal the
similarity of the anchor and G7 country’s industrial production responses to structural innovations
across the three different exchange rate eras.

17

Figure 9 is a useful starting place since it shows that the responses of the U.S. and Canadian
industrial production to all six structural disturbances were similar during all three periods. This
was expected given the high level of comovement between U.S. and Canadian industrial
production over the entire sample. Jumping to Figure 11 we see a contrasting view in which the
U.S. and German responses are quite similar in the PBW era, but somewhat different in the BW
and ERM eras. It is pretty much the case that all U.S. and German responses differed in the BW
era. The differences are subtle in the ERM period, with significant differences appearing in the
responses to German industrial production shocks and U.S. interest rate shocks. Figures 10, 12
and 13 reveal a similar picture for the bilateral models of the U.S., France, Italy and Japan. Figure
14 in contrast, highlights different U.S. and UK responses in the BW period and quite similar
responses in the PBW and ERM periods, which mirrors the comovement pattern between these
countries: low on the BW era and high in the PBW and ERM periods.
Just as in the case of the U.S.-Canada model, the Germany-France model reveals that the
similarity of responses for German and French industrial production are invariant to exchange
rate period (see Figure 15). The similarity of German, Italian and Japanese responses over the
PBW and ERM eras are also evident in Figures 16 and 17. These figures also highlight the
dissimilarity of their responses during the BW period. Differences in the German-UK responses
are harder to discern from Figure 18. The most noticeable difference in the ERM period is in the
German and UK response to shock to German industrial production, which matches the GermanU.S. case. I find that the results are robust to the change of ordering of anchor countries (see
Figures 19 to 21).
6.5

Counterfactual experiments: Shocks vs. Propagation

Table 9 quantifies these observations of the last three subsections through a series of
counterfactual simulation experiments. The first column of Table 9 reports the simulated business

18

comovement of G7 industrial production using the PBW propagation mechanism

{Φ PBW , APBW } and the PBW structural disturbance covariance matrix DPBW . These simulated
correlations mirror the actual correlations reported in Table 1. Columns 2 and 5 report similar
simulated statistics for the BW and ERM models. The simulated ERM correlations are extremely
close to their actual couterparts in Table1. The simulated BW correlations are somewhat higher
than their analogs in Table 1, but they preserve pattern of G7 correlations observed in the BW
era, such as the U.S. displaying significantly higher comovement with Canada.
Column 3 considers the role played by changes in the volatility of shocks in explaining the
increase in PBW correlations by simulating the BW model under the assumption that the
fundamental shocks to the BW economies were the same as the PBW economies. In other words,
I simulate business comovement of G7 industrial production using the BW propagation
mechanism {Φ BW , ABW } and the PBW structural disturbance covariance matrix DPBW .
Comparing columns 2 and 3 we see that simulating the BW model using the more volatile PBW
disturbances generates business comovement that has the same pattern as that observed using the
BW disturbances. I repeat this exercise for the ERM period, by simulating the ERM model under
the assumption that the fundamental shocks to the ERM economies were the same as the PBW
economies. The results are reported in column 6. Just as in the BW case, the pattern of
comovement is the same as that observed using the ERM disturbances. Columns 4 and 7 report
the findings of complimentary experiments in which the PBW model is simulated under the
assumption that the shocks facing the G7 economies were the same as those in the BW and PBW
eras, respectively. In both cases the pattern of comovement is the same as that observed in the
PBW era. This says that the pattern of comovement is invariant to the changes in the relative
volatility of structural disturbances over the three exchange rate periods. It also implies that that
the changing pattern of comovement is tied to changes in the propagation of shocks. In the case of

19

the PBW era vs. other exchange rate periods, Figures 9 to 21, the most obvious change to the
propagation mechanism was that the G7 economies responded to international and national
shocks in a similar. My ongoing research is exploring whether this reflects fundamental changes
in the policy reaction functions of the G7 economies.

7

Conclusion

The pattern of international comovement among the largest industrial nations changed
significantly over the BW, PBW and ERM exchange rate eras. One of the key lessons learned
from these statistics is that there is no consistent pattern regarding international comovement and
the exchange rate regime, since there are many examples of high and low international
comovement under both fixed and flexible exchange rate regimes.
These statistics also provide a fertile ground in which to examine the factors that underlie the
changing characteristics of international business cycle comovement. I exploit these data in this
paper for that purpose. Using a series of bilateral SVARs for various G7 pairs estimated over the
three exchange rate eras, I show that the changing patterns of international comovement observed
in three postwar exchange rate eras was due to changes in the propagation of shocks, rather
changes in the relative volatility of shocks themselves, across these time periods. The key result
underlying this finding is that, in contrast to the BW and ERM periods, all G7 economies
responded to international and national shocks in a similar way during the PBW era. One possible
interpretation of this discovery is that the policy reaction functions of the G7 economies were
more alike over this period. A test of that hypothesis is left to future research.

20

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Bank of Chicago Economic Perspectives, 4th Quarter, 56--83.
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monetary policy on exchange rates, Quarterly Journal of Economics 110, 975--1009.

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Eichengreen, B.J., 1992, Golden fetters: The gold standard and the great depression 1919-1939
(Oxford University Press, New York, NY).
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and flexible exchange rates: the Japanese experience, Journal of International Economics 32,
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Sims, C.A., 1972, Money, income, and causality, American Economic Review 62, 540--552.
Stock, J.H., and M.W. Watson, 2003, Understanding changes in international business cycle
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business cycle: Explaining international comovements, American Economic Review 85, 168-185.

22

Appendix A: Data sources and definitions
Industrial production
Source: International Monetary Fund, International Financial Statistics
Anchor inflation
Log first difference of consumer price index (CPI), annualized by multiplying by 12.
Source: Author’s calculations using data from International Monetary Fund, International
Financial Statistics
G7-anchor Inflation differential
Log first difference of real exchange rate, annualized by multiplying by 12.
Real exchange rate = G7 partner CPI/(anchor CPI * nominal G7 partner/anchor exchange rate)
Source: Author’s calculations using exchange rate and CPI data from International Monetary
Fund, International Financial Statistics
Interest rates
U.S.: Federal funds rate
Source: Board of Governors of the Federal Reserve System
Germany, France, Japan: Call money rate
Source: International Monetary Fund, International Financial Statistics
Canada, Italy, UK: 3 month Treasury bill rate
Source: International Monetary Fund, International Financial Statistics
G7-anchor interest differential
G7-partner interest rate - anchor interest rate
Source: Author’s calculations using interest rate data from International Monetary Fund,
International Financial Statistics.

23

Table 1
International Business Cycle Comovement Under Fixed and
Flexible Exchange Rate Regimes

Canada
France
Germany
Italy
Japan
UK
US

Correlation of Industrial Production with US
BW
PBW
0.75
0.73
-0.23
0.83
-0.16
0.78
-0.10
0.50
-0.68
0.83
-0.01
0.71
1.00
1.00

ERM
0.84
0.24
-0.01
0.32
-0.19
0.89
1.00

Canada
France
Germany
Italy
Japan
UK
US

Correlation of Industrial Production with Germany
BW
PBW
0.35
0.77
0.48
0.92
1.00
1.00
-0.55
0.84
0.03
0.97
0.72
0.59
-0.16
0.78

ERM
-0.25
0.95
1.00
0.68
0.85
0.02
-0.01

Canada
France
Germany
Italy
Japan
UK
US

Correlation of Industrial Production with Japan
BW
PBW
-0.53
0.77
0.22
0.91
0.03
0.97
0.25
0.85
1.00
1.00
0.23
0.55
-0.68
0.83

ERM
-0.33
0.81
0.85
0.58
1.00
-0.09
-0.19

Source: Author's calculations using International Monetary Fund monthly industrial
production data from International Financial Statistics on CD-ROM.
Notes: All reported data are filtered using Baxter/King band pass filter using a moving
average of 36 months, designed to capture frequencies of 18 months to 96 months (8
years). Correlation coefficients are calculated using data from the specified exchange rate
period. For example, correlation coefficients in the BW column are calculated from data
covering the years from the beginning of the sample 1958M1 to 1971M6

Table 2
International Business Cycle Volatility Under Fixed and Flexible
Exchange Rate Regimes

Canada
France
Germany
Italy
Japan
UK
US

Standard Deviation of Industrial Production
BW
PBW
1.61
2.80
2.18
3.03
3.56
2.92
2.89
4.19
4.06
3.95
2.17
3.77
2.03
3.70

Canada
France
Germany
Italy
Japan
UK
US

Relative Standard Deviation (PBW) of Industrial Production
BW
PBW
ERM
0.58
1.00
0.86
0.72
1.00
0.73
1.22
1.00
1.05
0.69
1.00
0.55
1.03
1.00
0.88
0.58
1.00
0.47
0.55
1.00
0.26

Canada
France
Germany
Italy
Japan
UK
US

Relative Standard Deviation (U.S.) of Industrial Production
BW
PBW
ERM
0.79
0.75
2.53
1.07
0.82
2.31
1.75
0.79
3.22
1.42
1.13
2.41
2.00
1.07
3.64
1.07
1.02
1.87
1.00
1.00
1.00

ERM
2.41
2.20
3.07
2.30
3.46
1.78
0.95

Source: Author's calculations using International Monetary Fund monthly industrial
production data from International Financial Statistics on CD-ROM.
Notes: All reported data are filtered using Baxter/King band pass filter using a moving
average of 36 months, designed to capture frequencies of 18 months to 96 months (8
years). Correlation coefficients are calculated using data from the specified exchange rate
period. For example, correlation coefficients in the BW column are calculated from data
covering the years from the beginning of the sample 1958M1 to 1971M6.

Table 3
Forecast error decompostion for industrial production of G7 countries across exchange rate regimes
U.S.--Canada Model
U.S.
Percentage of forecast error due to:

Months
Ahead
3
6
12
24
36
60
BCF

U.S. Industrial
Canadian Industrial
Production
Production
BW PBW ERM BW PBW ERM
96
97
91
1
0
3
79
87
85
12
1
6
51
66
51
33
1
6
21
40
27
22
1
3
17
27
19
24
1
5
14
17
19
34
4
12
24
32
19
28
9
22

U.S. Interest Rate
BW PBW ERM
2
0
3
6
4
3
9
16
9
24
29
9
21
34
14
16
35
19
20
23
12

U.S.--Canadian
Interest Rate
Differential
BW PBW ERM
0
2
1
0
5
1
0
6
24
1
5
47
1
4
47
1
3
36
1
6
37

U.S. Interest Rate
BW PBW ERM
0
4
6
1
11
7
2
22
5
10
37
5
10
41
13
8
41
21
9
26
14

U.S.--Canadian
Interest Rate
Differential
BW PBW ERM
2
0
4
1
0
4
1
0
12
2
0
36
2
0
41
2
0
29
2
3
22

U.S.--French
BW PBW ERM
0
0
0
0
0
1
0
4
1
1
6
1
1
8
1
1
9
0
2
5
1

U.S. Interest Rate
BW PBW ERM
1
0
3
2
2
3
6
10
25
19
27
43
17
31
58
16
27
72
23
25
27

U.S.--French
BW PBW ERM
1
0
0
1
0
1
0
3
5
8
2
6
15
2
4
14
2
5
19
7
7

U.S.--French
BW PBW ERM
0
0
2
1
1
2
1
5
1
1
6
1
1
7
1
1
8
1
2
4
1

U.S. Interest Rate
BW PBW ERM
4
0
3
4
1
3
4
2
2
5
14
2
7
22
2
10
23
15
17
14
5

U.S.--French
BW PBW ERM
3
1
2
3
1
2
8
6
5
14
7
11
12
5
9
16
4
6
31
12
7

U.S.--German
BW PBW ERM
1
1
0
2
1
1
2
1
1
5
2
0
5
2
0
6
2
0
8
1
0

U.S. Interest Rate
BW PBW ERM
2
0
2
2
1
4
15
6
22
29
17
40
24
22
53
24
23
63
33
16
34

U.S.--German
BW PBW ERM
0
0
0
1
0
1
4
2
3
2
11
5
2
13
4
4
12
2
9
13
8

U.S.--German
BW PBW ERM
1
1
5
2
2
5
4
2
4
7
2
4
8
2
4
7
2
4
4
1
3

U.S. Interest Rate
BW PBW ERM
0
0
3
2
1
3
5
2
2
6
13
3
10
21
3
11
23
4
4
12
5

U.S.--German
BW PBW ERM
1
2
0
2
3
0
9
2
1
25
11
1
31
14
2
23
12
3
27
12
1

U.S.--Canadian
U.S. Inflation
Inflation Differential
BW PBW ERM BW PBW ERM
1
0
1
1
0
0
1
2
3
2
1
2
3
9
4
3
2
7
31
24
2
1
1
13
36
33
1
1
2
14
35
39
0
1
2
14
25
24
2
2
6
8

Canada
Percentage of forecast error due to:

Months
Ahead
3
6
12
24
36
60
BCF

U.S. Industrial
Canadian Industrial
Production
Production
BW PBW ERM BW PBW ERM
9
15
11
85
79
71
8
22
9
86
61
69
5
23
6
83
39
68
4
15
3
57
17
46
5
10
3
53
9
31
6
6
11
54
9
28
10
11
8
51
25
50

U.S.--Canadian
U.S. Inflation
Inflation Differential
BW PBW ERM BW PBW ERM
4
1
3
0
1
3
4
3
8
1
2
3
8
11
7
1
5
2
26
28
5
1
3
5
30
37
3
0
3
8
29
42
2
0
3
9
26
26
3
1
9
4

U.S.--France Model
U.S.
Months
Ahead
3
6
12
24
36
60
BCF

Percentage of forecast error due to:
U.S. Industrial
French Industrial
BW PBW ERM BW PBW ERM
95
97
94
2
2
2
88
90
83
8
5
5
81
69
60
10
4
4
54
39
40
10
2
8
48
24
30
12
2
6
47
17
16
15
2
6
41
34
42
8
6
21

Months
Ahead
3
6
12
24
36
60
BCF

Percentage of forecast error due to:
U.S. Industrial
French Industrial
BW PBW ERM BW PBW ERM
3
5
1
89
92
90
9
15
2
81
80
86
15
26
2
72
56
84
25
24
4
54
36
77
31
18
10
46
26
74
31
14
14
38
18
61
16
22
6
30
37
77

U.S. Inflation
BW PBW ERM
0
0
1
1
3
7
3
11
6
7
24
2
6
33
1
6
43
1
7
24
3

France
U.S. Inflation
BW PBW ERM
1
1
2
1
2
6
1
5
5
1
12
5
3
21
4
4
33
3
3
11
3

U.S.--Germany Model
U.S.
Months
Ahead
3
6
12
24
36
60
BCF

Percentage of forecast error due to:
U.S. Industrial
German Industrial
BW PBW ERM BW PBW ERM
97
99
96
1
0
0
93
95
88
1
1
0
70
79
65
6
1
2
45
44
46
4
5
3
47
26
37
5
11
2
41
18
30
11
13
3
27
36
34
6
16
20

Months
Ahead
3
6
12
24
36
60
BCF

Percentage of forecast error due to:
U.S. Industrial
German Industrial
BW PBW ERM BW PBW ERM
0
7
1
91
88
90
3
17
2
83
75
89
3
29
3
73
60
89
2
24
5
55
40
87
7
15
5
41
32
84
20
11
5
29
26
83
16
17
2
37
49
88

U.S. Inflation
BW PBW ERM
1
0
1
0
2
7
4
11
8
15
21
5
16
25
4
13
33
3
18
18
4

Germany
U.S. Inflation
BW PBW ERM
7
2
1
8
3
1
6
5
1
4
10
1
4
16
1
10
26
1
12
9
0

Table 3 (continued)
Forecast error decompostion for industrial production of G7 countries across exchange rate regimes
U.S.--Italy Model
U.S.
Percentage of forecast error due to:

Months
Ahead
3
6
12
24
36
60
BCF

U.S. Industrial
Production
BW PBW ERM
92
97
90
86
91
84
83
70
81
60
33
65
51
21
50
51
16
37
34
43
41

Italian Industrial
Production
BW PBW ERM
4
2
1
9
4
3
11
4
4
9
3
4
7
5
3
10
13
5
7
5
14

U.S. Inflation
BW PBW ERM
0
0
1
0
1
5
1
3
9
8
15
14
9
20
16
7
18
16
12
19
7

U.S.--Italian Inflation
Differential
BW PBW ERM
0
0
0
1
0
1
1
0
0
0
1
1
1
2
1
2
3
1
2
1
1

U.S. Interest Rate
BW PBW ERM
3
0
7
3
4
7
2
21
5
3
46
14
5
51
28
6
49
40
17
31
30

U.S.--Italian Interest
Rate Differential
BW PBW ERM
0
1
0
1
1
0
2
1
1
20
0
2
28
0
1
24
1
1
28
1
6

U.S.--Italian Inflation
Differential
BW PBW ERM
1
1
0
4
1
1
3
0
2
3
1
2
2
1
2
2
2
2
3
1
1

U.S. Interest Rate
BW PBW ERM
1
0
1
4
1
2
5
2
4
5
16
8
5
29
8
5
35
15
12
16
14

U.S.--Italian Interest
Rate Differential
BW PBW ERM
0
0
1
1
1
7
1
1
13
1
1
11
6
1
12
14
1
10
13
1
21

U.S.--Japanese
BW PBW ERM
0
0
3
2
0
4
1
1
3
1
1
2
1
1
2
1
1
2
3
2
2

U.S. Interest Rate
BW PBW ERM
2
0
4
3
3
3
4
13
7
15
30
10
13
33
17
11
27
27
17
23
28

U.S.--Japanese
BW PBW ERM
0
1
0
2
5
0
13
10
2
13
17
15
16
17
15
27
21
10
16
12
8

U.S.--Japanese
BW PBW ERM
5
1
1
5
1
1
7
1
2
7
0
2
6
0
2
5
0
3
5
1
3

U.S. Interest Rate
BW PBW ERM
0
0
2
3
0
1
5
3
3
2
8
6
1
11
11
1
10
12
4
11
20

U.S.--Japanese
BW PBW ERM
8
1
0
20
8
1
51
26
2
71
40
3
73
39
7
71
40
11
62
38
10

U.S.--UK Inflation
BW PBW ERM
0
0
3
1
0
5
4
0
5
15
1
7
15
3
4
15
4
1
15
4
11

U.S. Interest Rate
BW PBW ERM
1
1
4
2
7
3
18
25
16
47
39
32
45
41
56
46
40
69
42
30
43

U.S.--UK Interest
BW PBW ERM
0
0
6
0
0
12
1
0
10
7
1
7
7
1
4
8
1
1
9
1
13

U.S.--UK Inflation
BW PBW ERM
15
0
1
24
2
1
33
3
5
39
5
8
40
6
5
40
6
5
35
3
12

U.S. Interest Rate
BW PBW ERM
3
0
5
3
1
4
3
16
4
7
36
8
7
38
34
9
37
61
10
27
39

U.S.--UK Interest
BW PBW ERM
2
1
9
2
2
8
3
2
7
3
2
14
2
2
12
3
2
6
4
3
13

Italy
Percentage of forecast error due to:

Months
Ahead
3
6
12
24
36
60
BCF

U.S. Industrial
Production
BW PBW ERM
0
3
17
2
10
23
8
19
26
22
18
30
28
14
29
33
11
29
16
24
16

Italian Industrial
Production
BW PBW ERM
98
96
78
87
88
64
81
76
53
68
62
47
54
49
46
40
42
38
51
46
46

U.S. Inflation
BW PBW ERM
0
0
2
2
1
3
1
1
3
1
2
3
3
6
4
5
9
7
6
12
2

U.S.--Japan Model
U.S.
Months
Ahead
3
6
12
24
36
60
BCF

Percentage of forecast error due to:
U.S. Industrial
Japaneseese
BW PBW ERM BW PBW ERM
97
97
90
0
0
0
92
88
82
0
3
1
79
62
72
1
12
6
48
28
42
3
10
26
40
19
26
3
10
38
33
13
15
2
13
45
40
40
47
4
7
13

Months
Ahead
3
6
12
24
36
60
BCF

Percentage of forecast error due to:
U.S. Industrial
Japaneseese
BW PBW ERM BW PBW ERM
1
20
2
85
78
95
2
25
7
69
64
89
1
19
10
37
47
80
3
11
11
16
26
76
5
8
10
11
23
67
8
5
10
7
23
60
6
14
8
16
21
54

U.S. Inflation
BW PBW ERM
1
1
1
0
1
9
1
2
10
20
13
5
26
20
2
26
24
1
21
15
1

Japan
U.S. Inflation
BW PBW ERM
0
1
0
0
1
1
0
5
2
1
15
2
3
19
3
8
21
4
8
16
5

U.S.--UK Model
U.S.
Months
Ahead
3
6
12
24
36
60
BCF

Percentage of forecast error due to:
U.S. Industrial
UK Industrial
BW PBW ERM BW PBW ERM
98
99
85
0
0
0
90
91
70
3
1
7
70
65
59
5
5
7
27
35
46
3
7
4
29
22
31
3
6
2
27
13
23
4
5
2
30
34
22
4
5
9

Months
Ahead
3
6
12
24
36
60
BCF

Percentage of forecast error due to:
U.S. Industrial
UK Industrial
BW PBW ERM BW PBW ERM
0
3
2
77
96
83
2
3
4
67
90
82
3
4
4
57
70
80
2
3
3
48
32
67
3
2
2
47
19
47
3
1
3
44
13
24
4
2
6
47
36
29

U.S. Inflation
BW PBW ERM
0
0
1
3
1
2
2
5
3
1
17
4
1
28
4
1
37
3
0
25
1

UK
U.S. Inflation
BW PBW ERM
2
0
1
2
2
1
1
5
1
1
23
1
1
33
1
1
40
1
0
29
0

Table 4
Forecast error decompostion for industrial production of G7 countries across exchange rate regimes
Germany--Canada Model
Germany
Percentage of forecast error due to:

Months
Ahead
3
6
12
24
36
60
BCF

German Industrial Canadian Industrial
Production
Production
BW PBW ERM BW PBW ERM
96
90
96
2
3
1
92
74
93
3
17
1
89
55
94
6
27
1
78
35
93
13
23
1
66
30
91
19
17
3
57
27
83
25
12
3
70
39
80
12
16
2

German Interest
Rate
BW PBW ERM
0
1
0
2
1
0
2
4
0
5
14
0
9
18
0
10
17
2
10
11
3

German--Canadian
Interest Rate
Differential
BW PBW ERM
2
1
1
1
1
2
1
1
2
1
9
2
3
17
2
5
28
6
3
21
10

German Interest
Rate
BW PBW ERM
3
0
2
14
1
3
25
4
2
22
11
12
18
15
17
15
16
17
22
13
14

German--Canadian
Interest Rate
Differential
BW PBW ERM
1
1
3
2
5
2
11
14
10
22
31
35
19
38
48
15
44
54
22
38
43

German--French
BW PBW ERM
4
1
0
11
1
1
18
1
1
20
3
1
21
7
2
22
13
3
17
7
1

German Interest
BW PBW ERM
1
1
4
1
1
6
7
3
8
25
19
8
33
29
12
36
27
22
36
26
22

German--French
BW PBW ERM
1
0
1
2
0
4
5
1
5
7
2
7
6
2
8
5
4
9
7
7
5

German--French
BW PBW ERM
0
2
1
4
6
1
6
7
1
12
9
3
16
11
5
18
15
7
14
6
5

German Interest
BW PBW ERM
1
1
2
2
1
3
3
1
4
14
10
15
24
20
34
30
20
46
29
22
42

German--French
BW PBW ERM
3
1
1
4
1
1
6
1
4
7
1
12
6
1
13
5
3
13
6
5
10

German--U.S.
BW PBW ERM
4
1
3
8
2
4
12
1
3
14
1
3
12
1
3
10
0
3
13
1
2

German Interest
BW PBW ERM
2
1
0
2
1
0
10
1
0
28
6
1
31
8
1
27
8
1
35
6
0

German--U.S.
BW PBW ERM
0
0
2
2
1
3
6
3
3
11
18
3
20
28
4
26
36
5
12
16
7

German--U.S.
BW PBW ERM
0
1
0
1
0
0
1
1
1
0
0
0
1
0
0
2
0
0
5
0
0

German Interest
BW PBW ERM
0
0
0
2
0
0
3
1
3
2
6
6
4
8
5
6
8
3
18
7
7

German--U.S.
BW PBW ERM
1
0
2
2
3
4
22
11
20
56
26
36
53
34
48
47
40
58
49
24
33

German--Canadian
German Inflation Inflation Differential
BW PBW ERM BW PBW ERM
0
3
0
0
2
1
0
3
2
1
4
1
0
5
2
3
8
1
0
11
2
4
8
2
0
12
2
3
6
2
0
12
2
3
4
3
0
7
2
3
5
4

Canada
Percentage of forecast error due to:

Months
Ahead
3
6
12
24
36
60
BCF

German Industrial Canadian Industrial
Production
Production
BW PBW ERM BW PBW ERM
0
1
1
93
95
92
0
2
1
76
83
91
1
2
4
60
61
78
2
1
8
53
36
35
10
4
4
52
23
16
23
10
7
47
13
6
18
14
20
36
20
9

German--Canadian
German Inflation Inflation Differential
BW PBW ERM BW PBW ERM
1
0
1
3
2
1
1
1
2
6
7
1
1
7
4
3
13
2
0
13
2
1
9
9
0
14
1
1
6
14
0
13
1
1
3
15
0
10
1
2
5
13

Germany--France Model
Germany
Months
Ahead
3
6
12
24
36
60
BCF

Percentage of forecast error due to:
German Industrial
French Industrial
BW PBW ERM BW PBW ERM
92
94
90
2
1
4
82
92
81
2
3
8
64
87
71
4
5
14
36
62
65
11
6
17
24
41
59
15
7
17
18
30
48
19
13
15
24
46
58
15
6
11

Months
Ahead
3
6
12
24
36
60
BCF

Percentage of forecast error due to:
German Industrial
French Industrial
BW PBW ERM BW PBW ERM
4
23
17
91
73
79
13
44
23
74
49
71
17
50
25
65
41
64
21
42
17
45
35
52
17
31
14
35
28
31
14
23
12
32
28
18
18
40
22
32
20
17

German Inflation
BW PBW ERM
1
3
1
1
2
1
1
2
2
0
9
1
0
13
2
0
13
2
1
9
2

France
German Inflation
BW PBW ERM
0
0
1
3
1
2
3
1
1
2
5
1
1
9
3
1
10
4
1
7
4

Germany--U.S. Model
Germany
Months
Ahead
3
6
12
24
36
60
BCF

Percentage of forecast error due to:
German Industrial
U.S. Industrial
BW PBW ERM BW PBW ERM
92
91
93
1
5
1
83
82
89
4
13
1
66
67
88
4
27
2
45
44
85
3
25
4
31
35
83
5
16
5
25
30
81
11
10
5
28
54
81
11
14
3

Months
Ahead
3
6
12
24
36
60
BCF

Percentage of forecast error due to:
German Industrial
U.S. Industrial
BW PBW ERM BW PBW ERM
0
1
1
95
98
96
1
3
1
91
93
94
4
3
2
67
83
73
3
6
3
37
52
54
6
13
3
35
31
43
16
17
2
25
18
36
8
21
17
20
37
38

German Inflation
BW PBW ERM
1
2
0
1
1
3
1
1
4
1
7
4
0
12
5
1
16
5
0
9
7

U.S.
German Inflation
BW PBW ERM
3
0
0
3
1
0
4
2
1
2
9
1
2
14
1
2
17
2
1
11
5

Table 4 (continued)
Forecast error decompostion for industrial production of G7 countries across exchange rate regimes
Germany--Italy Model
Germany
Percentage of forecast error due to:

Months
Ahead
3
6
12
24
36
60
BCF

German Industrial
Production
BW PBW ERM
94
92
97
87
82
88
85
74
83
76
51
74
67
39
64
56
32
47
68
62
56

Italian Industrial
Production
BW PBW ERM
0
3
1
2
13
2
3
15
2
9
14
2
18
14
5
30
17
12
11
8
7

German Interest
Rate
BW PBW ERM
1
1
2
3
1
2
2
3
1
3
15
1
3
20
3
3
21
11
5
13
10

German--Italian
Interest Rate
Differential
BW PBW ERM
2
2
0
3
3
2
3
6
2
4
10
12
5
11
18
5
10
16
7
6
11

German Interest
Rate
BW PBW ERM
0
1
2
4
1
7
4
1
18
3
6
35
3
13
35
3
15
36
3
11
30

German--Italian
Interest Rate
Differential
BW PBW ERM
0
0
0
0
1
1
4
1
2
9
3
4
10
5
6
10
5
6
12
2
10

German--Japanese
BW PBW ERM
0
2
0
1
3
1
1
3
5
1
3
13
2
2
13
7
2
15
4
2
14

German Interest
BW PBW ERM
0
1
0
4
1
3
3
3
5
3
20
3
5
26
3
6
21
3
5
17
3

German--Japanese
BW PBW ERM
0
0
2
0
1
7
1
9
14
1
13
14
9
9
12
25
9
14
19
10
12

German--Japanese
BW PBW ERM
0
1
2
0
1
3
1
1
11
7
1
18
12
1
17
13
0
17
12
1
20

German Interest
BW PBW ERM
1
1
1
3
1
1
1
1
1
6
7
1
8
11
2
7
9
2
11
13
2

German--Japanese
BW PBW ERM
1
2
0
1
9
1
12
26
6
39
31
12
46
24
11
50
20
11
41
24
15

German--Italian
German Inflation Inflation Differential
BW PBW ERM BW PBW ERM
1
2
0
2
0
1
1
1
1
5
1
6
1
2
2
6
1
10
2
8
2
5
2
9
3
11
2
5
5
9
3
11
2
4
9
11
2
6
2
7
5
14

Italy
Percentage of forecast error due to:

Months
Ahead
3
6
12
24
36
60
BCF

German Industrial
Production
BW PBW ERM
1
6
6
1
18
8
2
33
11
2
33
8
5
26
9
7
21
9
5
47
20

Italian Industrial
Production
BW PBW ERM
96
90
89
89
75
82
85
61
63
82
51
45
78
46
38
77
44
34
74
31
27

German--Italian
German Inflation Inflation Differential
BW PBW ERM BW PBW ERM
2
0
1
0
3
2
4
1
1
2
6
1
3
1
2
2
4
4
2
2
2
2
4
5
2
5
2
2
6
10
1
6
2
2
10
14
3
5
2
3
4
11

Germany--Japan Model
Germany
Months
Ahead
3
6
12
24
36
60
BCF

Percentage of forecast error due to:
German Industrial
Japaneseese
BW PBW ERM BW PBW ERM
96
92
95
2
4
2
91
87
84
3
7
1
89
72
67
5
12
6
81
51
39
13
9
30
66
52
40
17
7
30
46
55
36
15
10
31
64
60
37
8
7
33

Months
Ahead
3
6
12
24
36
60
BCF

Percentage of forecast error due to:
German Industrial
Japaneseese
BW PBW ERM BW PBW ERM
1
2
2
97
93
93
1
4
4
93
85
88
1
2
4
83
70
76
3
16
9
44
44
60
3
30
15
30
34
55
2
39
14
27
31
55
3
31
13
31
28
51

German Inflation
BW PBW ERM
1
1
0
1
1
4
1
1
3
1
3
2
1
4
2
1
3
1
1
3
1

Japan
German Inflation
BW PBW ERM
1
0
2
2
1
2
2
1
1
1
1
1
1
1
1
1
1
1
2
3
1

Germany--UK Model
Germany
Months
Ahead
3
6
12
24
36
60
BCF

Percentage of forecast error due to:
German Industrial
UK Industrial
BW PBW ERM BW PBW ERM
80
89
96
3
4
0
57
87
86
24
3
1
37
82
79
34
2
2
18
57
75
37
1
4
11
37
74
31
5
5
9
24
72
26
11
5
19
50
75
26
8
3

Months
Ahead
3
6
12
24
36
60
BCF

Percentage of forecast error due to:
German Industrial
UK Industrial
BW PBW ERM BW PBW ERM
4
5
4
74
86
83
8
10
4
54
77
80
6
20
4
41
57
78
3
15
8
32
33
60
2
10
7
27
27
49
3
7
23
23
25
38
7
23
35
28
30
28

German Inflation
BW PBW ERM
0
5
0
1
5
1
1
6
2
3
16
2
4
21
2
4
23
2
3
10
2

German--UK
BW PBW ERM
12
0
0
9
1
5
4
1
10
12
1
10
25
1
10
38
2
10
29
3
11

German Interest German--UK Interest
BW PBW ERM BW PBW ERM
4
1
1
1
1
3
3
0
1
7
4
6
10
3
0
13
6
7
16
20
0
13
4
9
17
32
0
11
4
9
15
37
1
9
4
10
13
20
0
9
8
9

German--UK
BW PBW ERM
12
4
1
23
5
1
24
4
6
35
2
11
43
2
11
50
2
7
32
5
7

German Interest German--UK Interest
BW PBW ERM BW PBW ERM
6
3
3
4
0
4
8
4
5
6
1
6
15
10
4
11
1
5
16
28
5
10
3
10
15
35
5
8
4
20
14
39
3
7
4
21
17
24
2
12
3
23

UK
German Inflation
BW PBW ERM
0
3
5
2
3
4
2
7
4
4
19
7
4
23
9
4
23
7
4
16
4

Table 5
Forecast error decompostion for industrial production of G7 countries across exchange rate regimes
Japan--U.S. Model
Japan
Percentage of forecast error due to:

Months
Ahead
3
6
12
24
36
60
BCF

Japaneseese
Industrial
Production
BW PBW ERM
88
88
94
72
78
91
39
52
84
17
21
80
11
16
71
7
14
64
17
20
64

U.S. Industrial
Production
BW PBW ERM
1
8
2
2
11
4
1
6
7
3
2
8
6
2
7
9
2
7
7
5
4

Japaneseese
Japanese--U.S.
Inflation
Inflation Differential
BW PBW ERM BW PBW ERM
3
2
1
0
1
2
3
6
1
0
1
1
3
24
1
0
0
1
3
42
2
1
2
1
3
47
2
1
2
1
2
49
3
3
2
3
2
40
3
2
4
2

Japaneseese
Interest Rate
BW PBW ERM
7
0
0
19
3
1
49
17
2
72
31
3
76
30
5
76
30
10
64
29
7

Japanese--U.S.
Interest Rate
Differential
BW PBW ERM
0
0
2
5
1
1
8
0
4
4
1
7
3
2
13
3
3
14
8
2
19

Japaneseese
Interest Rate
BW PBW ERM
0
0
0
2
3
1
12
6
3
17
14
16
21
15
16
33
17
10
18
10
12

Japanese--U.S.
Interest Rate
Differential
BW PBW ERM
2
0
6
4
1
5
5
7
9
23
17
10
24
20
16
20
17
26
29
13
26

Japaneseese
BW PBW ERM
0
1
0
0
5
1
12
16
6
48
21
13
59
16
12
63
13
12
55
17
17

Japanese--German
BW PBW ERM
1
1
1
3
4
1
2
3
1
2
7
1
2
13
1
2
11
1
3
18
1

Japaneseese
BW PBW ERM
0
0
0
0
1
2
1
6
9
2
11
14
13
8
13
34
7
15
22
8
15

Japanese--German
BW PBW ERM
0
1
0
5
2
2
6
2
4
6
21
3
7
32
3
5
27
2
8
24
3

U.S.
Percentage of forecast error due to:

Months
Ahead
3
6
12
24
36
60
BCF

Japaneseese
Industrial
Production
BW PBW ERM
0
5
0
0
9
1
1
16
6
4
9
25
4
6
38
3
5
47
5
9
15

U.S. Industrial
Production
BW PBW ERM
97
93
89
91
83
87
80
53
78
48
25
44
41
22
25
35
20
13
39
43
42

Japaneseese
Japanese--U.S.
Inflation
Inflation Differential
BW PBW ERM BW PBW ERM
0
1
2
0
0
2
2
4
3
0
0
2
1
15
2
0
3
2
1
33
2
7
3
3
1
36
1
9
2
4
1
39
0
9
2
3
2
22
1
7
2
4

Japan-Germany Model
Japan
Months
Ahead
3
6
12
24
36
60
BCF

Percentage of forecast error due to:
Japaneseese
German Industrial
BW PBW ERM BW PBW ERM
93
92
95
1
0
1
88
81
91
3
1
2
77
53
79
5
3
2
39
24
62
4
17
6
26
16
57
3
27
11
23
13
56
2
36
11
28
20
50
3
22
10

Months
Ahead
3
6
12
24
36
60
BCF

Percentage of forecast error due to:
Japaneseese
German Industrial
BW PBW ERM BW PBW ERM
7
8
3
90
88
95
11
12
3
80
81
88
16
15
6
72
69
72
26
10
26
62
47
41
23
7
27
52
45
40
18
6
28
37
49
37
11
11
29
55
49
37

Japaneseese
BW PBW ERM
3
4
1
4
9
1
4
24
1
3
31
1
2
28
0
2
26
0
2
22
0

Japanese--German
BW PBW ERM
1
2
2
1
1
4
1
1
11
4
1
19
7
1
18
8
0
19
9
1
22

Germany
Japaneseese
BW PBW ERM
1
0
0
1
0
1
2
3
1
2
8
0
2
6
0
2
8
0
2
6
0

Japanese--German
BW PBW ERM
2
3
1
2
4
4
3
4
8
3
4
16
3
3
16
5
2
18
2
3
16

Table 6
Estimated percentage standard deviation of structural disturbances
U.S.-Canada model
Structural Disturbance

Period
BW
PBW
ERM
Ratio
BW/PBW
ERM/PBW

U.S. Industrial
Production
0.83
0.65
0.38

Canadian
Industrial
Production
1.05
1.29
0.61

1.27
0.59

0.82
0.48

U.S. Inflation
1.89
2.85
1.64

U.S.--Canadian
Inflation
Differential
7.87
13.59
12.33

U.S. Interest
Rate
0.25
0.65
0.12

U.S.--Canadian
Interest Rate
Differential
0.27
0.50
0.39

0.66
0.58

0.58
0.91

0.39
0.18

0.54
0.78

U.S. Inflation
1.67
2.83
1.71

U.S.--French
Inflation
Differential
10.70
33.35
28.78

U.S. Interest
Rate
0.25
0.68
0.12

U.S.--French
Interest Rate
Differential
0.32
0.48
0.44

0.59
0.60

0.32
0.86

0.36
0.17

0.67
0.92

U.S. Inflation
1.69
2.85
1.69

U.S.--German
Inflation
Differential
6.81
35.17
30.69

U.S. Interest
Rate
0.23
0.66
0.12

U.S.--German
Interest Rate
Differential
0.61
1.02
0.16

0.59
0.59

0.19
0.87

0.35
0.18

0.59
0.15

U.S. Interest
Rate
0.24
0.66
0.11

U.S.--Italian
Interest Rate
Differential
0.14
0.27
0.31

U.S.--France model
Structural Disturbance

Period
BW
PBW
ERM
Ratio
BW/PBW
ERM/PBW

U.S. Industrial French Industrial
Production
Production
0.64
3.61
0.66
1.36
0.39
0.83

0.97
0.59

2.67
0.61

U.S.--Germany model
Structural Disturbance

Period
BW
PBW
ERM
Ratio
BW/PBW
ERM/PBW

U.S. Industrial German Industrial
Production
Production
0.65
1.55
0.66
1.53
0.41
1.18

0.98
0.61

1.01
0.77

U.S.--Italy model
Structural Disturbance

Period
BW
PBW
ERM
Ratio
BW/PBW
ERM/PBW

U.S. Industrial
Production
0.63
0.66
0.41

Italian Industrial
Production
1.83
2.35
1.29

U.S. Inflation
1.66
2.88
1.71

U.S.--Italian
Inflation
Differential
4.22
29.66
31.40

0.95
0.62

0.78
0.55

0.57
0.59

0.14
1.06

0.36
0.17

0.53
1.14

U.S. Interest
Rate
0.25
0.67
0.12

U.S.--Japanese
Interest Rate
Differential
0.93
0.35
0.14

U.S.--Japan model
Structural Disturbance

Period
BW
PBW
ERM
Ratio
BW/PBW
ERM/PBW

U.S. Industrial
Production
0.87
0.63
0.39

Japanese
Industrial
Production
1.05
1.00
1.02

U.S. Inflation
1.71
2.71
1.61

U.S.--Japanese
Inflation
Differential
8.04
34.92
35.46

1.39
0.61

1.05
1.02

0.63
0.59

0.23
1.02

0.38
0.18

2.64
0.39

U.S.--UK model
Structural Disturbance

Period
BW
PBW
ERM
Ratio
BW/PBW
ERM/PBW

U.S. Industrial
Production
0.58
0.64
0.35

UK Industrial
Production
0.70
1.47
0.58

U.S. Inflation
1.38
2.89
1.62

U.S.--UK Inflation
Differential
14.98
32.35
29.20

U.S. Interest
Rate
0.20
0.66
0.12

U.S.--UK Interest
Rate Differential
0.19
0.53
0.22

0.90
0.54

0.48
0.39

0.48
0.56

0.46
0.90

0.30
0.18

0.36
0.41

Table 7
Estimated percentage standard deviation of structural disturbances
Germany--Canada model
Structural Disturbance

Period
BW
PBW
ERM
Ratio
BW/PBW
ERM/PBW

German
Industrial
Production
1.57
1.50
1.25

Canadian
Industrial
Production
0.92
1.27
0.67

1.05
0.84

0.72
0.52

German-German-Canadian Inflation German Interest Canadian Interest
Differential
Rate
Rate Differential
German Inflation
2.91
9.52
0.61
0.31
2.80
35.18
0.96
0.74
3.44
32.47
0.16
0.41

1.04
1.23

0.27
0.92

0.64
0.17

0.41
0.56

Germany--France model
Structural Disturbance

Period
BW
PBW
ERM
Ratio
BW/PBW
ERM/PBW

German
Industrial
Production
1.56
1.56
1.12

French Industrial
Production
3.43
1.21
0.84

German Inflation
3.11
2.82
3.52

German--French
Inflation
Differential
13.02
16.72
6.18

German Interest
Rate
0.62
0.98
0.17

German--French
Interest Rate
Differential
0.34
0.51
0.43

1.01
0.72

2.83
0.69

1.10
1.25

0.78
0.37

0.63
0.17

0.66
0.84

German Interest
Rate
0.61
0.98
0.16

German--U.S.
Interest Rate
Differential
0.23
0.68
0.12

0.63
0.16

0.35
0.17

German Interest
Rate
0.63
0.94
0.17

German--Italian
Interest Rate
Differential
0.15
0.26
0.31

0.68
0.18

0.55
1.16

Germany--U.S. model
Structural Disturbance

Period
BW
PBW
ERM
Ratio
BW/PBW
ERM/PBW

German
Industrial
Production
1.54
1.55
1.22

U.S. Industrial
Production
0.64
0.67
0.41

German Inflation
2.88
2.76
3.51

German--U.S.
Inflation
Differential
6.32
35.30
28.08

0.99
0.78

0.94
0.62

1.04
1.27

0.18
0.80

Germany--Italy model
Structural Disturbance

Period
BW
PBW
ERM
Ratio
BW/PBW
ERM/PBW

German
Industrial
Production
1.58
1.53
1.20

Italian Industrial
Production
1.77
2.20
1.35

German Inflation
2.85
2.70
3.39

German--Italian
Inflation
Differential
6.81
23.39
21.32

1.04
0.78

0.80
0.61

1.06
1.26

0.29
0.91

Germany--Japan model
Structural Disturbance

Period
BW
PBW
ERM
Ratio
BW/PBW
ERM/PBW

German
Industrial
Production
1.52
1.54
1.20

Japanese
Industrial
Production
0.92
1.06
1.05

0.99
0.78

0.87
0.99

German-German-Japanese Inflation German Interest Japanese Interest
German Inflation
Differential
Rate
Rate Differential
2.93
9.56
0.64
0.84
2.67
32.67
1.01
0.34
3.46
32.37
0.15
0.13

1.10
1.30

0.29
0.99

0.63
0.15

2.47
0.38

Germany--UK model
Structural Disturbance

Period
BW
PBW
ERM
Ratio
BW/PBW
ERM/PBW

German
Industrial
Production
0.98
1.52
1.21

UK Industrial
Production
0.70
1.47
0.58

German Inflation
2.41
2.69
3.53

German--UK
Inflation
Differential
16.06
31.57
22.92

German Interest
Rate
0.64
1.00
0.14

German--UK
Interest Rate
Differential
0.20
0.55
0.21

0.64
0.80

0.48
0.39

0.90
1.31

0.51
0.73

0.64
0.14

0.37
0.39

Table 8
Estimated percentage standard deviation of structural disturbances
Japan--U.S. model
Structural Disturbance

Period
BW
PBW
ERM
Ratio
BW/PBW
ERM/PBW

Japanese
Industrial
Production
1.07
0.99
1.03

U.S. Industrial
Production
0.88
0.62
0.39

Japanese
Inflation
8.08
7.89
3.93

Japanese--U.S.
Inflation
Differential
2.92
35.22
33.62

Japanese
Interest Rate
0.92
0.35
0.14

Japanese--U.S.
Interest Rate
Differential
0.27
0.66
0.12

1.08
1.04

1.42
0.63

1.02
0.50

0.08
0.95

2.62
0.39

0.41
0.19

Japan--Germany model
Structural Disturbance

Period
BW
PBW
ERM
Ratio
BW/PBW
ERM/PBW

Japanese
Industrial
Production
0.94
1.01
1.06

German Industrial
Production
1.48
1.53
1.21

Japanese
Inflation
7.07
7.86
3.73

Japanese-German Inflation
Differential
7.57
33.04
31.37

Japanese
Interest Rate
0.81
0.35
0.13

Japanese-German Interest
Rate Differential
0.62
1.04
0.15

0.93
1.05

0.96
0.79

0.90
0.47

0.23
0.95

2.30
0.36

0.60
0.14

Table 9
Simulated International Business Cycle Comovement

Canada
France
Germany
Italy
Japan
UK
US

Correlation of Industrial production with US
Post-Bretton
Bretton Woods
Woods
(PBW,PBW)
(BW,BW)
(BW,PBW)
0.86
0.90
0.91
0.86
0.02
-0.38
0.87
-0.20
0.03
0.68
0.29
0.13
0.81
0.29
-0.04
0.70
0.49
0.56
1.00
1.00
1.00

(PBW,BW)
0.84
0.81
0.84
0.67
0.84
0.59
1.00

Exchange Rate Mechanism
(ERM,ERM)
(ERM,PBW)
(PBW,ERM)
0.83
0.82
0.82
0.31
0.22
0.86
0.02
-0.11
0.82
0.42
0.42
0.65
-0.13
-0.13
0.77
0.82
0.87
0.68
1.00
1.00
1.00

Canada
France
Germany
Italy
Japan
UK
US

Correlation of Industrial production with Germany
Post-Bretton
Bretton Woods
Woods
(PBW,PBW)
(BW,BW)
(BW,PBW)
(PBW,BW)
0.85
0.08
0.06
0.79
0.89
0.77
0.93
0.74
1.00
1.00
1.00
1.00
0.81
0.04
-0.16
0.83
0.83
0.32
0.43
0.86
0.74
0.76
0.77
0.83
0.87
-0.37
-0.34
0.84

Exchange Rate Mechanism
(ERM,ERM)
(ERM,PBW)
(PBW,ERM)
0.15
0.34
0.83
0.83
0.88
0.91
1.00
1.00
1.00
0.66
0.59
0.81
0.59
0.74
0.80
0.14
0.20
0.86
0.06
-0.09
0.85

Canada
France
Germany
Italy
Japan
UK
US

Correlation of Industrial production with Japan
Post-Bretton
Bretton Woods
Woods
(PBW,PBW)
(BW,BW)
(BW,PBW)
0.68
0.26
-0.11
0.79
0.68
0.80
0.81
0.32
0.31
0.74
0.52
0.60
1.00
1.00
1.00
0.61
0.36
0.40
0.79
0.28
0.32

Exchange Rate Mechanism
(ERM,ERM)
(ERM,PBW)
(PBW,ERM)
-0.20
-0.06
0.74
0.51
0.54
0.78
0.59
0.77
0.79
0.04
-0.03
0.75
1.00
1.00
1.00
0.00
-0.15
0.23
-0.07
0.00
0.79

(PBW,BW)
0.74
0.67
0.85
0.85
1.00
0.53
0.82

Figure 1
Cyclical Movements of U.S. and G7 Industrial Production
France--U.S.
12.0
10.0
Canada

U.S.

% deviation from trend

% deviation from trend

Canada--U.S.
12.0
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
-8.0
-10.0
-12.0

4.0
2.0
0.0
-2.0
-4.0
-6.0
-8.0
-12.0
1961M1 1964M1 1967M1 1970M1 1973M1 1976M1 1979M1 1982M1 1985M1 1988M1 1991M1 1994M1

Germany--U.S.

Italy--U.S.
12.0

12.0
Germany

8.0

10.0

U.S.

% deviation from trend

% deviation from trend

10.0
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
-8.0

U.S.

6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
-8.0
-10.0

-12.0

-12.0

1961M1 1964M1 1967M1 1970M1 1973M1 1976M1 1979M1 1982M1 1985M1 1988M1 1991M1 1994M1

1961M1 1964M1 1967M1 1970M1 1973M1 1976M1 1979M1 1982M1 1985M1 1988M1 1991M1 1994M1

Japan--U.S.

UK--U.S.
12.0

12.0
Japan

10.0

U.S.

6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0

% deviation from trend

% deviation from trend

Italy

8.0

-10.0

8.0

U.S.

6.0

-10.0

1961M1 1964M1 1967M1 1970M1 1973M1 1976M1 1979M1 1982M1 1985M1 1988M1 1991M1 1994M1

10.0

France

8.0

8.0

U.S.

4.0
2.0
0.0
-2.0
-4.0
-6.0

-8.0

-8.0

-10.0

-10.0

-12.0

-12.0

1961M1 1964M1 1967M1 1970M1 1973M1 1976M1 1979M1 1982M1 1985M1 1988M1 1991M1 1994M1

UK

6.0

1961M1 1964M1 1967M1 1970M1 1973M1 1976M1 1979M1 1982M1 1985M1 1988M1 1991M1 1994M1

Source: Author's calculations using International Monetary Fund monthly industrial production data from International Financial Statistics on CD-ROM.
Notes: All reported data are filtered using Baxter/King band pass filter using a moving average of 36 months, designed to capture frequencies of 18 months to 96 months (8
years).

Figure 2
Cyclical Movements of German and G7 Industrial Production
France--Germany
12.0
10.0
Canada

Germany

% deviation from trend

% deviation from trend

Canada--Germany
12.0
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
-8.0
-10.0
-12.0

4.0
2.0
0.0
-2.0
-4.0
-6.0
-8.0
-12.0
1961M1 1964M1 1967M1 1970M1 1973M1 1976M1 1979M1 1982M1 1985M1 1988M1 1991M1 1994M1

U.S.--Germany.

Italy--Germany
12.0

12.0
U.S.

8.0

10.0

Germany

% deviation from trend

% deviation from trend

10.0
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
-8.0

Germany

6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
-8.0
-10.0

-12.0

-12.0

1961M1 1964M1 1967M1 1970M1 1973M1 1976M1 1979M1 1982M1 1985M1 1988M1 1991M1 1994M1

1961M1 1964M1 1967M1 1970M1 1973M1 1976M1 1979M1 1982M1 1985M1 1988M1 1991M1 1994M1

Japan--Germany

UK--Germany
12.0

12.0
Japan

10.0

Germany

6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0

% deviation from trend

% deviation from trend

Italy

8.0

-10.0

8.0

Germany

6.0

-10.0

1961M1 1964M1 1967M1 1970M1 1973M1 1976M1 1979M1 1982M1 1985M1 1988M1 1991M1 1994M1

10.0

France

8.0

8.0

Germany

4.0
2.0
0.0
-2.0
-4.0
-6.0

-8.0

-8.0

-10.0

-10.0

-12.0

-12.0

1961M1 1964M1 1967M1 1970M1 1973M1 1976M1 1979M1 1982M1 1985M1 1988M1 1991M1 1994M1

UK

6.0

1961M1 1964M1 1967M1 1970M1 1973M1 1976M1 1979M1 1982M1 1985M1 1988M1 1991M1 1994M1

Source: Author's calculations using International Monetary Fund monthly industrial production data from International Financial Statistics on CD-ROM.
Notes: All reported data are filtered using Baxter/King band pass filter using a moving average of 36 months, designed to capture frequencies of 18 months to 96 months (8
years).

Figure 3
Impulse response functions: Shock to U.S. Industrial Production
Effect on German Industrial Production

Effect on U.S. Industrial Production
2.0

% deviation from trend

% deviation from trend

2.0

1.0

0.0

-1.0

1.0

0.0

-1.0

-2.0

-2.0
0

6

12

18

24

30

36

42

48

0

54

6

Effect on U.S. Inflation

18

24

30

36

42

48

54

Effect on German-U.S. Inflation Differential
20.0

% deviation from trend

2.0

% deviation from trend

12

1.0

0.0

-1.0

-2.0

10.0

0.0

-10.0

-20.0
0

6

12

18

24

30

36

42

48

54

0

6

Effect on U.S. Interest Rates

12

18

24

30

36

42

48

54

Effect on German-U.S. Interest Differential

2.0

% deviation from trend

% deviation from trend

2.0

1.0

1.0

0.0

0.0

-1.0

-1.0

-2.0

-2.0
0

6

12

18

24

30

36

42

48

54

0

6

12

18

24

30

36

42

48

54

Notes: Solid line is the point estimate of the impulse response from the bilateral VAR for the U.S. and Germany estimated over the PBW era. The dashed lines
are 90 percent confidence intervals computed using standard bootstrap Monte Carlo procedures.

Figure 4
Impulse response functions: Shock to German Industrial Production
Effect on German Industrial Production

Effect on U.S. Industrial Production
2.0

% deviation from trend

% deviation from trend

2.0

1.0

0.0

1.0

0.0

-1.0

-1.0

-2.0

-2.0
0

6

12

18

24

30

36

42

48

0

54

6

12

Effect on U.S. Inflation

30

36

42

48

54

Effect on German-U.S. Inflation Differential

% deviation from trend

% deviation from trend

24

20.0

2.0

1.0

0.0

-1.0

10.0

0.0

-10.0

-2.0

-20.0
0

6

12

18

24

30

36

42

48

54

0

6

Effect on U.S. Interest Rates

12

18

24

30

36

42

48

54

Effect on German-U.S. Interest Differential

2.0

2.0

% deviation from trend

% deviation from trend

18

1.0

0.0

-1.0

1.0

0.0

-1.0

-2.0

-2.0
0

6

12

18

24

30

36

42

48

54

0

6

12

18

24

30

36

42

48

54

Figure 5
Impulse response functions: Shock to U.S. Inflation
Effect on German Industrial Production

Effect on U.S. Industrial Production
2.0

% deviation from trend

% deviation from trend

2.0

1.0

0.0

-1.0

1.0

0.0

-1.0

-2.0

-2.0
0

6

12

18

24

30

36

42

48

0

54

6

Effect on U.S. Inflation

18

24

30

36

42

48

54

Effect on German-U.S. Inflation Differential

3.0

20.0

2.0

% deviation from trend

% deviation from trend

12

1.0
0.0

-1.0

10.0

0.0

-10.0

-2.0
-3.0

-20.0
0

6

12

18

24

30

36

42

48

54

0

6

Effect on U.S. Interest Rates

18

24

30

36

42

48

54

Effect on German-U.S. Interest Differential

2.0

2.0

% deviation from trend

% deviation from trend

12

1.0

0.0

-1.0

1.0

0.0

-1.0

-2.0

-2.0
0

6

12

18

24

30

36

42

48

54

0

6

12

18

24

30

36

42

48

54

Figure 6
Impulse response functions: Shock to German-U.S. Inflation Differential
Effect on German Industrial Production

Effect on U.S. Industrial Production
2.0

% deviation from trend

% deviation from trend

2.0

1.0

0.0

-1.0

1.0

0.0

-1.0

-2.0

-2.0
0

6

12

18

24

30

36

42

48

0

54

6

Effect on U.S. Inflation

18

24

30

36

42

48

54

Effect on German-U.S. Inflation Differential

3.0

40.0
30.0

2.0

% deviation from trend

% deviation from trend

12

1.0
0.0

-1.0
-2.0

20.0
10.0
0.0
-10.0
-20.0
-30.0

-3.0

-40.0
0

6

12

18

24

30

36

42

48

54

0

6

Effect on U.S. Interest Rates

12

18

24

30

36

42

48

54

Effect on German-U.S. Interest Differential

2.0

% deviation from trend

% deviation from trend

2.0

1.0

1.0

0.0

0.0

-1.0

-1.0

-2.0

-2.0
0

6

12

18

24

30

36

42

48

54

0

6

12

18

24

30

36

42

48

54

Figure 7
Impulse response functions: Shock to U.S. Interest Rates
Effect on German Industrial Production

Effect on U.S. Industrial Production
2.0

% deviation from trend

% deviation from trend

2.0

1.0

0.0

-1.0

1.0

0.0

-1.0

-2.0

-2.0
0

6

12

18

24

30

36

42

48

0

54

6

Effect on U.S. Inflation

12

18

24

30

36

42

48

54

Effect on German-U.S. Inflation Differential
20.0

% deviation from trend

2.0
1.0
0.0
-1.0
-2.0
-3.0
0

6

12

18

24

30

36

42

48

54

10.0

0.0

-10.0

-20.0
0

6

12

18

Effect on U.S. Interest Rates

24

30

36

42

48

54

Effect on German-U.S. Interest Differential

2.0

2.0

% deviation from trend

% deviation from trend

% deviation from trend

3.0

1.0

0.0

-1.0

-2.0

1.0

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

0

6

12

18

24

30

36

42

48

54

Figure 8
Impulse response functions: Shock to German-U.S. Interest Rate Differential
Effect on German Industrial Production

Effect on U.S. Industrial Production
2.0

% deviation from trend

% deviation from trend

2.0

1.0

0.0

-1.0

1.0

0.0

-1.0

-2.0

-2.0
0

6

12

18

24

30

36

42

48

0

54

6

Effect on U.S. Inflation

24

30

36

42

48

54

Effect on German-U.S. Inflation Differential

2.0

% deviation from trend

% deviation from trend

18

20.0

3.0

1.0
0.0
-1.0
-2.0
-3.0

10.0

0.0

-10.0

-20.0
0

6

12

18

24

30

36

42

48

54

0

6

Effect on U.S. Interest Rates

12

18

24

30

36

42

48

54

Effect on German-U.S. Interest Differential

2.0

2.0

% deviation from trend

% deviation from trend

12

1.0

0.0

-1.0

-2.0

1.0

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

0

6

12

18

24

30

36

42

48

54

Bretton Woods

Post-Bretton Woods

Shock to U.S. Industrial Production

Shock to U.S. Industrial Production

1.0

1.0

1.0

0.0

-1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

6

18

24

30

36

42

48

54

0

1.0

1.0

1.0

0.0

-1.0

% deviation from trend

2.0

0.0

-1.0

12

18

24

30

36

42

48

54

0

6

12

Shock to U.S. Inflation

18

24

30

36

42

48

0

54

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

-2.0

0.0

-1.0

-2.0
6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

0

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

0

1.0

% deviation from trend

1.0

% deviation from trend

1.0

-2.0

0.0

-1.0

24

30

36

42

48

54

0

Shock to U.S.-Canadian Interest Rate Differential

6

12

18

24

30

36

42

48

0

54

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

48

54

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

Shock to U.S.-Canadian Interest Rate Differential

2.0

-2.0

42

-1.0

2.0

-1.0

36

0.0

Shock to U.S.-Canadian Interest Rate Differential

0.0

30

-2.0

-2.0
18

24

Shock to U.S. Interest Rate
2.0

12

6

Shock to U.S. Interest Rate

-1.0

18

-1.0

2.0

6

12

0.0

2.0

0

6

-2.0
0

Shock to U.S. Interest Rate

0.0

54

Shock to U.S.-Canadian Inflation Differential

2.0

0

48

-1.0

2.0

-2.0

42

0.0

Shock to U.S.-Canadian Inflation Differential

-1.0

36

-2.0
0

Shock to U.S.-Canadian Inflation Differential

0.0

30

Shock to U.S. Inflation

2.0

-1.0

24

-1.0

Shock to U.S. Inflation

0.0

18

0.0

2.0

0

12

-2.0

-2.0
6

6

Shock to Canadian Industrial Production

2.0

% deviation from trend

% deviation from trend

12

2.0

0

% deviation from trend

-1.0

Shock to Canadian Industrial Production

-2.0

% deviation from trend

0.0

-2.0
0

Shock to Canadian Industrial Production

% deviation from trend

Shock to U.S. Industrial Production

2.0

-2.0

% deviation from trend

Exchange Rate Mechanism

2.0

% deviation from trend

% deviation from trend

Figure 9
Impulse response functions: U.S. vs. Canadian Industrial Production

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

0

6

12

18

24

30

36

42

48

54

Bretton Woods

Post-Bretton Woods

Shock to U.S. Industrial Production

Shock to U.S. Industrial Production

1.0

1.0

1.0

0.0

-1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

6

12

24

30

36

42

48

54

0

1.0

1.0

1.0

0.0

-1.0

% deviation from trend

2.0

0.0

-1.0

12

18

24

30

36

42

48

54

0

6

12

Shock to U.S. Inflation

18

24

30

36

42

48

0

54

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

-2.0

0.0

-1.0

-2.0
6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

0

1.0

% deviation from trend

1.0

% deviation from trend

1.0

0.0

-1.0

-2.0
12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

0

1.0

% deviation from trend

1.0

% deviation from trend

1.0

0.0

-1.0

18

24

30

36

42

48

54

0

Shock to U.S.-French Interest Rate Differential

6

12

18

24

30

36

42

48

0

54

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

54

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

Shock to U.S.-French Interest Rate Differential

2.0

-2.0

48

-1.0

2.0

-1.0

42

0.0

Shock to U.S.-French Interest Rate Differential

0.0

36

-2.0

-2.0
12

30

Shock to U.S. Interest Rate
2.0

-2.0

24

-1.0

2.0

6

6

Shock to U.S. Interest Rate

-1.0

18

0.0

2.0

0

12

-2.0
0

Shock to U.S. Interest Rate

0.0

54

Shock to U.S.-French Inflation Differential
2.0

6

48

-1.0

2.0

-2.0

42

0.0

2.0

0

6

Shock to U.S.-French Inflation Differential

-1.0

36

-2.0
0

Shock to U.S.-French Inflation Differential

0.0

30

Shock to U.S. Inflation

2.0

-1.0

24

-1.0

Shock to U.S. Inflation

0.0

18

0.0

2.0

0

12

-2.0

-2.0
6

6

Shock to French Industrial Production

2.0

% deviation from trend

% deviation from trend

18

2.0

0

% deviation from trend

-1.0

Shock to French Industrial Production

-2.0

% deviation from trend

0.0

-2.0
0

Shock to French Industrial Production

% deviation from trend

Shock to U.S. Industrial Production

2.0

-2.0

% deviation from trend

Exchange Rate Mechanism

2.0

% deviation from trend

% deviation from trend

Figure 10
Impulse response functions: U.S. vs. French Industrial Production

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

0

6

12

18

24

30

36

42

48

54

Bretton Woods

Post-Bretton Woods

Shock to U.S. Industrial Production

Shock to U.S. Industrial Production

1.0

1.0

1.0

0.0

-1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

6

18

24

30

36

42

48

54

0

1.0

1.0

1.0

0.0

-1.0

% deviation from trend

2.0

0.0

-1.0

12

18

24

30

36

42

48

54

0

6

12

Shock to U.S. Inflation

18

24

30

36

42

48

0

54

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

-2.0

0.0

-1.0

-2.0
6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

0

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

0

1.0

% deviation from trend

1.0

% deviation from trend

1.0

-2.0

0.0

-1.0

24

30

36

42

48

54

0

Shock to U.S.-German Interest Rate Differential

6

12

18

24

30

36

42

48

0

54

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

48

54

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

Shock to U.S.-German Interest Rate Differential

2.0

-2.0

42

-1.0

2.0

-1.0

36

0.0

Shock to U.S.-German Interest Rate Differential

0.0

30

-2.0

-2.0
18

24

Shock to U.S. Interest Rate
2.0

12

6

Shock to U.S. Interest Rate

-1.0

18

-1.0

2.0

6

12

0.0

2.0

0

6

-2.0
0

Shock to U.S. Interest Rate

0.0

54

Shock to U.S.-German Inflation Differential

2.0

0

48

-1.0

2.0

-2.0

42

0.0

Shock to U.S.-German Inflation Differential

-1.0

36

-2.0
0

Shock to U.S.-German Inflation Differential

0.0

30

Shock to U.S. Inflation

2.0

-1.0

24

-1.0

Shock to U.S. Inflation

0.0

18

0.0

2.0

0

12

-2.0

-2.0
6

6

Shock to German Industrial Production

2.0

% deviation from trend

% deviation from trend

12

2.0

0

% deviation from trend

-1.0

Shock to German Industrial Production

-2.0

% deviation from trend

0.0

-2.0
0

Shock to German Industrial Production

% deviation from trend

Shock to U.S. Industrial Production

2.0

-2.0

% deviation from trend

Exchange Rate Mechanism

2.0

% deviation from trend

% deviation from trend

Figure 11
Impulse response functions: U.S. vs. German Industrial Production

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

0

6

12

18

24

30

36

42

48

54

Bretton Woods

Post-Bretton Woods

Shock to U.S. Industrial Production

Shock to U.S. Industrial Production

1.0

1.0

1.0

0.0

-1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

6

18

24

30

36

42

48

54

0

1.0

1.0

1.0

0.0

-1.0

% deviation from trend

2.0

0.0

-1.0

12

18

24

30

36

42

48

54

0

6

12

Shock to U.S. Inflation

18

24

30

36

42

48

0

54

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

-2.0

0.0

-1.0

-2.0
6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

0

1.0

% deviation from trend

1.0

% deviation from trend

1.0

0.0

-1.0

-2.0
12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

0

1.0

% deviation from trend

1.0

% deviation from trend

1.0

0.0

-1.0

18

24

30

36

42

48

54

0

Shock to U.S.-Italian Interest Rate Differential

6

12

18

24

30

36

42

48

0

54

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

54

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

Shock to U.S.-Italian Interest Rate Differential

2.0

-2.0

48

-1.0

2.0

-1.0

42

0.0

Shock to U.S.-Italian Interest Rate Differential

0.0

36

-2.0

-2.0
12

30

Shock to U.S. Interest Rate
2.0

-2.0

24

-1.0

2.0

6

6

Shock to U.S. Interest Rate

-1.0

18

0.0

2.0

0

12

-2.0
0

Shock to U.S. Interest Rate

0.0

54

Shock to U.S.-Italian Inflation Differential
2.0

6

48

-1.0

2.0

-2.0

42

0.0

2.0

0

6

Shock to U.S.-Italian Inflation Differential

-1.0

36

-2.0
0

Shock to U.S.-Italian Inflation Differential

0.0

30

Shock to U.S. Inflation

2.0

-1.0

24

-1.0

Shock to U.S. Inflation

0.0

18

0.0

2.0

0

12

-2.0

-2.0
6

6

Shock to Italian Industrial Production

2.0

% deviation from trend

% deviation from trend

12

2.0

0

% deviation from trend

-1.0

Shock to Italian Industrial Production

-2.0

% deviation from trend

0.0

-2.0
0

Shock to Italian Industrial Production

% deviation from trend

Shock to U.S. Industrial Production

2.0

-2.0

% deviation from trend

Exchange Rate Mechanism

2.0

% deviation from trend

% deviation from trend

Figure 12
Impulse response functions: U.S. vs. Italian Industrial Production

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

0

6

12

18

24

30

36

42

48

54

Bretton Woods

Post-Bretton Woods

Shock to U.S. Industrial Production

Shock to U.S. Industrial Production

1.0

1.0

1.0

0.0

-1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

6

18

24

30

36

42

48

54

0

1.0

1.0

1.0

0.0

-1.0

% deviation from trend

2.0

0.0

-1.0

12

18

24

30

36

42

48

54

0

6

12

Shock to U.S. Inflation

18

24

30

36

42

48

0

54

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

-2.0

0.0

-1.0

-2.0
6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

0

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

0

1.0

% deviation from trend

1.0

% deviation from trend

1.0

-2.0

0.0

-1.0

24

30

36

42

48

54

0

Shock to U.S.-Japanese Interest Rate Differential

6

12

18

24

30

36

42

48

0

54

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

48

54

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

Shock to U.S.-Japanese Interest Rate Differential

2.0

-2.0

42

-1.0

2.0

-1.0

36

0.0

Shock to U.S.-Japanese Interest Rate Differential

0.0

30

-2.0

-2.0
18

24

Shock to U.S. Interest Rate
2.0

12

6

Shock to U.S. Interest Rate

-1.0

18

-1.0

2.0

6

12

0.0

2.0

0

6

-2.0
0

Shock to U.S. Interest Rate

0.0

54

Shock to U.S.-Japanese Inflation Differential

2.0

0

48

-1.0

2.0

-2.0

42

0.0

Shock to U.S.-Japanese Inflation Differential

-1.0

36

-2.0
0

Shock to U.S.-Japanese Inflation Differential

0.0

30

Shock to U.S. Inflation

2.0

-1.0

24

-1.0

Shock to U.S. Inflation

0.0

18

0.0

2.0

0

12

-2.0

-2.0
6

6

Shock to Japanese Industrial Production

2.0

% deviation from trend

% deviation from trend

12

2.0

0

% deviation from trend

-1.0

Shock to Japanese Industrial Production

-2.0

% deviation from trend

0.0

-2.0
0

Shock to Japanese Industrial Production

% deviation from trend

Shock to U.S. Industrial Production

2.0

-2.0

% deviation from trend

Exchange Rate Mechanism

2.0

% deviation from trend

% deviation from trend

Figure 13
Impulse response functions: U.S. vs. Japanese Industrial Production

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

0

6

12

18

24

30

36

42

48

54

Bretton Woods

Post-Bretton Woods

Shock to U.S. Industrial Production

Shock to U.S. Industrial Production

1.0

1.0

1.0

0.0

-1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

6

18

24

30

36

42

48

54

0

1.0

1.0

1.0

0.0

-1.0

% deviation from trend

2.0

0.0

-1.0

12

18

24

30

36

42

48

54

0

6

12

Shock to U.S. Inflation

18

24

30

36

42

48

0

54

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

-2.0

0.0

-1.0

-2.0
6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

0

1.0

% deviation from trend

1.0

% deviation from trend

1.0

0.0

-1.0

-2.0
12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

0

1.0

% deviation from trend

1.0

% deviation from trend

1.0

0.0

-1.0

18

24

30

36

42

48

54

0

Shock to U.S.-U.K. Interest Rate Differential

6

12

18

24

30

36

42

48

0

54

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

54

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

Shock to U.S.-U.K. Interest Rate Differential

2.0

-2.0

48

-1.0

2.0

-1.0

42

0.0

Shock to U.S.-U.K. Interest Rate Differential

0.0

36

-2.0

-2.0
12

30

Shock to U.S. Interest Rate
2.0

-2.0

24

-1.0

2.0

6

6

Shock to U.S. Interest Rate

-1.0

18

0.0

2.0

0

12

-2.0
0

Shock to U.S. Interest Rate

0.0

54

Shock to U.S.-U.K. Inflation Differential
2.0

6

48

-1.0

2.0

-2.0

42

0.0

2.0

0

6

Shock to U.S.-U.K. Inflation Differential

-1.0

36

-2.0
0

Shock to U.S.-U.K. Inflation Differential

0.0

30

Shock to U.S. Inflation

2.0

-1.0

24

-1.0

Shock to U.S. Inflation

0.0

18

0.0

2.0

0

12

-2.0

-2.0
6

6

Shock to U.K. Industrial Production

2.0

% deviation from trend

% deviation from trend

12

2.0

0

% deviation from trend

-1.0

Shock to U.K. Industrial Production

-2.0

% deviation from trend

0.0

-2.0
0

Shock to U.K. Industrial Production

% deviation from trend

Shock to U.S. Industrial Production

2.0

-2.0

% deviation from trend

Exchange Rate Mechanism

2.0

% deviation from trend

% deviation from trend

Figure 14
Impulse response functions: U.S. vs. U.K. Industrial Production

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

0

6

12

18

24

30

36

42

48

54

Bretton Woods

Post-Bretton Woods

Shock to German Industrial Production

Shock to German Industrial Production

1.0

1.0

1.0

0.0

-1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

6

18

24

30

36

42

48

54

0

1.0

1.0

1.0

0.0

-1.0

% deviation from trend

2.0

0.0

-1.0

12

18

24

30

36

42

48

54

0

6

12

Shock to German Inflation

18

24

30

36

42

48

0

54

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

-2.0

0.0

-1.0

-2.0
6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

0

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

0

1.0

% deviation from trend

1.0

% deviation from trend

1.0

-2.0

0.0

-1.0

24

30

36

42

48

54

0

Shock to German-French Interest Rate Differential

6

12

18

24

30

36

42

48

0

54

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

48

54

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

Shock to German-French Interest Rate Differential

2.0

-2.0

42

-1.0

2.0

-1.0

36

0.0

Shock to German-French Interest Rate Differential

0.0

30

-2.0

-2.0
18

24

Shock to German Interest Rate
2.0

12

6

Shock to German Interest Rate

-1.0

18

-1.0

2.0

6

12

0.0

2.0

0

6

-2.0
0

Shock to German Interest Rate

0.0

54

Shock to German-French Inflation Differential

2.0

0

48

-1.0

2.0

-2.0

42

0.0

Shock to German-French Inflation Differential

-1.0

36

-2.0
0

Shock to German-French Inflation Differential

0.0

30

Shock to German Inflation

2.0

-1.0

24

-1.0

Shock to German Inflation

0.0

18

0.0

2.0

0

12

-2.0

-2.0
6

6

Shock to French Industrial Production

2.0

% deviation from trend

% deviation from trend

12

2.0

0

% deviation from trend

-1.0

Shock to French Industrial Production

-2.0

% deviation from trend

0.0

-2.0
0

Shock to French Industrial Production

% deviation from trend

Shock to German Industrial Production

2.0

-2.0

% deviation from trend

Exchange Rate Mechanism

2.0

% deviation from trend

% deviation from trend

Figure 15
Impulse response functions: German vs. French Industrial Production

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

0

6

12

18

24

30

36

42

48

54

Bretton Woods

Post-Bretton Woods

Shock to German Industrial Production

Shock to German Industrial Production

1.0

1.0

1.0

0.0

-1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

6

18

24

30

36

42

48

54

0

1.0

1.0

1.0

0.0

-1.0

% deviation from trend

2.0

0.0

-1.0

12

18

24

30

36

42

48

54

0

6

12

Shock to German Inflation

18

24

30

36

42

48

0

54

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

-2.0

0.0

-1.0

-2.0
6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

0

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

0

1.0

% deviation from trend

1.0

% deviation from trend

1.0

-2.0

0.0

-1.0

24

30

36

42

48

54

0

Shock to German-Italian Interest Rate Differential

6

12

18

24

30

36

42

48

0

54

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

48

54

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

Shock to German-Italian Interest Rate Differential

2.0

-2.0

42

-1.0

2.0

-1.0

36

0.0

Shock to German-Italian Interest Rate Differential

0.0

30

-2.0

-2.0
18

24

Shock to German Interest Rate
2.0

12

6

Shock to German Interest Rate

-1.0

18

-1.0

2.0

6

12

0.0

2.0

0

6

-2.0
0

Shock to German Interest Rate

0.0

54

Shock to German-Italian Inflation Differential

2.0

0

48

-1.0

2.0

-2.0

42

0.0

Shock to German-Italian Inflation Differential

-1.0

36

-2.0
0

Shock to German-Italian Inflation Differential

0.0

30

Shock to German Inflation

2.0

-1.0

24

-1.0

Shock to German Inflation

0.0

18

0.0

2.0

0

12

-2.0

-2.0
6

6

Shock to Italian Industrial Production

2.0

% deviation from trend

% deviation from trend

12

2.0

0

% deviation from trend

-1.0

Shock to Italian Industrial Production

-2.0

% deviation from trend

0.0

-2.0
0

Shock to Italian Industrial Production

% deviation from trend

Shock to German Industrial Production

2.0

-2.0

% deviation from trend

Exchange Rate Mechanism

2.0

% deviation from trend

% deviation from trend

Figure 16
Impulse response functions: German vs. Italian Industrial Production

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

0

6

12

18

24

30

36

42

48

54

Bretton Woods

Post-Bretton Woods

Shock to German Industrial Production

Shock to German Industrial Production

1.0

1.0

1.0

0.0

-1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

6

18

24

30

36

42

48

54

0

1.0

1.0

1.0

0.0

-1.0

% deviation from trend

2.0

0.0

-1.0

12

18

24

30

36

42

48

54

0

6

12

Shock to German Inflation

18

24

30

36

42

48

0

54

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

-2.0

0.0

-1.0

-2.0
6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

0

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

0

1.0

% deviation from trend

1.0

% deviation from trend

1.0

-2.0

0.0

-1.0

24

30

36

42

48

54

0

Shock to German-Japanese Interest Rate Differential

6

12

18

24

30

36

42

48

0

54

Shock to German-Japanese Interest Rate Differential

1.0

% deviation from trend

1.0

% deviation from trend

1.0

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

48

54

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

Shock to German-Japanese Interest Rate Differential
2.0

-2.0

42

-1.0

2.0

-1.0

36

0.0

2.0

0.0

30

-2.0

-2.0
18

24

Shock to German Interest Rate
2.0

12

6

Shock to German Interest Rate

-1.0

18

-1.0

2.0

6

12

0.0

2.0

0

6

-2.0
0

Shock to German Interest Rate

0.0

54

Shock to German-Japanese Inflation Differential

2.0

0

48

-1.0

2.0

-2.0

42

0.0

Shock to German-Japanese Inflation Differential

-1.0

36

-2.0
0

Shock to German-Japanese Inflation Differential

0.0

30

Shock to German Inflation

2.0

-1.0

24

-1.0

Shock to German Inflation

0.0

18

0.0

2.0

0

12

-2.0

-2.0
6

6

Shock to Japanese Industrial Production

2.0

% deviation from trend

% deviation from trend

12

2.0

0

% deviation from trend

-1.0

Shock to Japanese Industrial Production

-2.0

% deviation from trend

0.0

-2.0
0

Shock to Japanese Industrial Production

% deviation from trend

Shock to German Industrial Production

2.0

-2.0

% deviation from trend

Exchange Rate Mechanism

2.0

% deviation from trend

% deviation from trend

Figure 17
Impulse response functions: German vs. Japanese Industrial Production

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

0

6

12

18

24

30

36

42

48

54

Bretton Woods

Post-Bretton Woods

Shock to German Industrial Production

Shock to German Industrial Production

1.0

1.0

1.0

0.0

-1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

6

18

24

30

36

42

48

54

0

1.0

1.0

1.0

0.0

-1.0

% deviation from trend

2.0

0.0

-1.0

12

18

24

30

36

42

48

54

0

6

12

Shock to German Inflation

18

24

30

36

42

48

0

54

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

-2.0

0.0

-1.0

-2.0
6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

0

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

0

1.0

% deviation from trend

1.0

% deviation from trend

1.0

-2.0

0.0

-1.0

24

30

36

42

48

54

0

Shock to German-U.K. Interest Rate Differential

6

12

18

24

30

36

42

48

0

54

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

48

54

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

Shock to German-U.K. Interest Rate Differential

2.0

-2.0

42

-1.0

2.0

-1.0

36

0.0

Shock to German-U.K. Interest Rate Differential

0.0

30

-2.0

-2.0
18

24

Shock to German Interest Rate
2.0

12

6

Shock to German Interest Rate

-1.0

18

-1.0

2.0

6

12

0.0

2.0

0

6

-2.0
0

Shock to German Interest Rate

0.0

54

Shock to German-U.K. Inflation Differential

2.0

0

48

-1.0

2.0

-2.0

42

0.0

Shock to German-U.K. Inflation Differential

-1.0

36

-2.0
0

Shock to German-U.K. Inflation Differential

0.0

30

Shock to German Inflation

2.0

-1.0

24

-1.0

Shock to German Inflation

0.0

18

0.0

2.0

0

12

-2.0

-2.0
6

6

Shock to U.K. Industrial Production

2.0

% deviation from trend

% deviation from trend

12

2.0

0

% deviation from trend

-1.0

Shock to U.K. Industrial Production

-2.0

% deviation from trend

0.0

-2.0
0

Shock to U.K. Industrial Production

% deviation from trend

Shock to German Industrial Production

2.0

-2.0

% deviation from trend

Exchange Rate Mechanism

2.0

% deviation from trend

% deviation from trend

Figure 18
Impulse response functions: German vs. U.K. Industrial Production

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

0

6

12

18

24

30

36

42

48

54

Bretton Woods

Post-Bretton Woods

Shock to German Industrial Production

Shock to German Industrial Production

1.0

1.0

1.0

0.0

-1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

6

18

24

30

36

42

48

54

0

1.0

1.0

1.0

0.0

-1.0

% deviation from trend

2.0

0.0

-1.0

12

18

24

30

36

42

48

54

0

6

12

Shock to German Inflation

18

24

30

36

42

48

0

54

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

-2.0

0.0

-1.0

-2.0
6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

0

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

0

1.0

% deviation from trend

1.0

% deviation from trend

1.0

-2.0

0.0

-1.0

24

30

36

42

48

54

0

Shock to German-U.S. Interest Rate Differential

6

12

18

24

30

36

42

48

0

54

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

48

54

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

Shock to German-U.S. Interest Rate Differential

2.0

-2.0

42

-1.0

2.0

-1.0

36

0.0

Shock to German-U.S. Interest Rate Differential

0.0

30

-2.0

-2.0
18

24

Shock to German Interest Rate
2.0

12

6

Shock to German Interest Rate

-1.0

18

-1.0

2.0

6

12

0.0

2.0

0

6

-2.0
0

Shock to German Interest Rate

0.0

54

Shock to German-U.S. Inflation Differential

2.0

0

48

-1.0

2.0

-2.0

42

0.0

Shock to German-U.S. Inflation Differential

-1.0

36

-2.0
0

Shock to German-U.S. Inflation Differential

0.0

30

Shock to German Inflation

2.0

-1.0

24

-1.0

Shock to German Inflation

0.0

18

0.0

2.0

0

12

-2.0

-2.0
6

6

Shock to U.S. Industrial Production

2.0

% deviation from trend

% deviation from trend

12

2.0

0

% deviation from trend

-1.0

Shock to U.S. Industrial Production

-2.0

% deviation from trend

0.0

-2.0
0

Shock to U.S. Industrial Production

% deviation from trend

Shock to German Industrial Production

2.0

-2.0

% deviation from trend

Exchange Rate Mechanism

2.0

% deviation from trend

% deviation from trend

Figure 19
Impulse response functions: German vs. U.S. Industrial Production

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

0

6

12

18

24

30

36

42

48

54

Bretton Woods

Post-Bretton Woods

Shock to Japanese Industrial Production

Shock to Japanese Industrial Production

1.0

1.0

1.0

0.0

-1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

6

18

24

30

36

42

48

54

0

1.0

1.0

1.0

0.0

-1.0

% deviation from trend

2.0

0.0

-1.0

12

18

24

30

36

42

48

54

0

6

12

Shock to Japanese Inflation

18

24

30

36

42

48

0

54

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

-2.0

0.0

-1.0

-2.0
6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

0

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

0

1.0

% deviation from trend

1.0

% deviation from trend

1.0

-2.0

0.0

-1.0

24

30

36

42

48

54

0

Shock to Japanese-German Interest Rate Differential

6

12

18

24

30

36

42

48

0

54

Shock to Japanese-German Interest Rate Differential

1.0

% deviation from trend

1.0

% deviation from trend

1.0

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

48

54

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

Shock to Japanese-German Interest Rate Differential
2.0

-2.0

42

-1.0

2.0

-1.0

36

0.0

2.0

0.0

30

-2.0

-2.0
18

24

Shock to Japanese Interest Rate
2.0

12

6

Shock to Japanese Interest Rate

-1.0

18

-1.0

2.0

6

12

0.0

2.0

0

6

-2.0
0

Shock to Japanese Interest Rate

0.0

54

Shock to Japanese-German Inflation Differential

2.0

0

48

-1.0

2.0

-2.0

42

0.0

Shock to Japanese-German Inflation Differential

-1.0

36

-2.0
0

Shock to Japanese-German Inflation Differential

0.0

30

Shock to Japanese Inflation

2.0

-1.0

24

-1.0

Shock to Japanese Inflation

0.0

18

0.0

2.0

0

12

-2.0

-2.0
6

6

Shock to German Industrial Production

2.0

% deviation from trend

% deviation from trend

12

2.0

0

% deviation from trend

-1.0

Shock to German Industrial Production

-2.0

% deviation from trend

0.0

-2.0
0

Shock to German Industrial Production

% deviation from trend

Shock to Japanese Industrial Production

2.0

-2.0

% deviation from trend

Exchange Rate Mechanism

2.0

% deviation from trend

% deviation from trend

Figure 20
Impulse response functions: Japanese vs. German Industrial Production

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

0

6

12

18

24

30

36

42

48

54

Bretton Woods

Post-Bretton Woods

Shock to Japanese Industrial Production

Shock to Japanese Industrial Production

1.0

1.0

1.0

0.0

-1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

6

18

24

30

36

42

48

54

0

1.0

1.0

1.0

0.0

-1.0

% deviation from trend

2.0

0.0

-1.0

12

18

24

30

36

42

48

54

0

6

12

Shock to Japanese Inflation

18

24

30

36

42

48

0

54

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

-2.0

0.0

-1.0

-2.0
6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

0

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

0

1.0

% deviation from trend

1.0

% deviation from trend

1.0

-2.0

0.0

-1.0

24

30

36

42

48

54

0

Shock to Japanese-U.S. Interest Rate Differential

6

12

18

24

30

36

42

48

0

54

1.0

1.0

% deviation from trend

1.0

% deviation from trend

2.0

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

48

54

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

6

12

18

24

30

36

42

48

54

Shock to Japanese-U.S. Interest Rate Differential

2.0

-2.0

42

-1.0

2.0

-1.0

36

0.0

Shock to Japanese-U.S. Interest Rate Differential

0.0

30

-2.0

-2.0
18

24

Shock to Japanese Interest Rate
2.0

12

6

Shock to Japanese Interest Rate

-1.0

18

-1.0

2.0

6

12

0.0

2.0

0

6

-2.0
0

Shock to Japanese Interest Rate

0.0

54

Shock to Japanese-U.S. Inflation Differential

2.0

0

48

-1.0

2.0

-2.0

42

0.0

Shock to Japanese-U.S. Inflation Differential

-1.0

36

-2.0
0

Shock to Japanese-U.S. Inflation Differential

0.0

30

Shock to Japanese Inflation

2.0

-1.0

24

-1.0

Shock to Japanese Inflation

0.0

18

0.0

2.0

0

12

-2.0

-2.0
6

6

Shock to U.S. Industrial Production

2.0

% deviation from trend

% deviation from trend

12

2.0

0

% deviation from trend

-1.0

Shock to U.S. Industrial Production

-2.0

% deviation from trend

0.0

-2.0
0

Shock to U.S. Industrial Production

% deviation from trend

Shock to Japanese Industrial Production

2.0

-2.0

% deviation from trend

Exchange Rate Mechanism

2.0

% deviation from trend

% deviation from trend

Figure 21
Impulse response functions: Japanese vs. U.S. Industrial Production

0.0

-1.0

-2.0
0

6

12

18

24

30

36

42

48

54

0

6

12

18

24

30

36

42

48

54

Working Paper Series
A series of research studies on regional economic issues relating to the Seventh Federal
Reserve District, and on financial and economic topics.
Dynamic Monetary Equilibrium in a Random-Matching Economy
Edward J. Green and Ruilin Zhou

WP-00-1

The Effects of Health, Wealth, and Wages on Labor Supply and Retirement Behavior
Eric French

WP-00-2

Market Discipline in the Governance of U.S. Bank Holding Companies:
Monitoring vs. Influencing
Robert R. Bliss and Mark J. Flannery

WP-00-3

Using Market Valuation to Assess the Importance and Efficiency
of Public School Spending
Lisa Barrow and Cecilia Elena Rouse
Employment Flows, Capital Mobility, and Policy Analysis
Marcelo Veracierto
Does the Community Reinvestment Act Influence Lending? An Analysis
of Changes in Bank Low-Income Mortgage Activity
Drew Dahl, Douglas D. Evanoff and Michael F. Spivey

WP-00-4

WP-00-5

WP-00-6

Subordinated Debt and Bank Capital Reform
Douglas D. Evanoff and Larry D. Wall

WP-00-7

The Labor Supply Response To (Mismeasured But) Predictable Wage Changes
Eric French

WP-00-8

For How Long Are Newly Chartered Banks Financially Fragile?
Robert DeYoung

WP-00-9

Bank Capital Regulation With and Without State-Contingent Penalties
David A. Marshall and Edward S. Prescott

WP-00-10

Why Is Productivity Procyclical? Why Do We Care?
Susanto Basu and John Fernald

WP-00-11

Oligopoly Banking and Capital Accumulation
Nicola Cetorelli and Pietro F. Peretto

WP-00-12

Puzzles in the Chinese Stock Market
John Fernald and John H. Rogers

WP-00-13

The Effects of Geographic Expansion on Bank Efficiency
Allen N. Berger and Robert DeYoung

WP-00-14

Idiosyncratic Risk and Aggregate Employment Dynamics
Jeffrey R. Campbell and Jonas D.M. Fisher

WP-00-15

1

Working Paper Series (continued)
Post-Resolution Treatment of Depositors at Failed Banks: Implications for the Severity
of Banking Crises, Systemic Risk, and Too-Big-To-Fail
George G. Kaufman and Steven A. Seelig

WP-00-16

The Double Play: Simultaneous Speculative Attacks on Currency and Equity Markets
Sujit Chakravorti and Subir Lall

WP-00-17

Capital Requirements and Competition in the Banking Industry
Peter J.G. Vlaar

WP-00-18

Financial-Intermediation Regime and Efficiency in a Boyd-Prescott Economy
Yeong-Yuh Chiang and Edward J. Green

WP-00-19

How Do Retail Prices React to Minimum Wage Increases?
James M. MacDonald and Daniel Aaronson

WP-00-20

Financial Signal Processing: A Self Calibrating Model
Robert J. Elliott, William C. Hunter and Barbara M. Jamieson

WP-00-21

An Empirical Examination of the Price-Dividend Relation with Dividend Management
Lucy F. Ackert and William C. Hunter

WP-00-22

Savings of Young Parents
Annamaria Lusardi, Ricardo Cossa, and Erin L. Krupka

WP-00-23

The Pitfalls in Inferring Risk from Financial Market Data
Robert R. Bliss

WP-00-24

What Can Account for Fluctuations in the Terms of Trade?
Marianne Baxter and Michael A. Kouparitsas

WP-00-25

Data Revisions and the Identification of Monetary Policy Shocks
Dean Croushore and Charles L. Evans

WP-00-26

Recent Evidence on the Relationship Between Unemployment and Wage Growth
Daniel Aaronson and Daniel Sullivan

WP-00-27

Supplier Relationships and Small Business Use of Trade Credit
Daniel Aaronson, Raphael Bostic, Paul Huck and Robert Townsend

WP-00-28

What are the Short-Run Effects of Increasing Labor Market Flexibility?
Marcelo Veracierto

WP-00-29

Equilibrium Lending Mechanism and Aggregate Activity
Cheng Wang and Ruilin Zhou

WP-00-30

Impact of Independent Directors and the Regulatory Environment on Bank Merger Prices:
Evidence from Takeover Activity in the 1990s
Elijah Brewer III, William E. Jackson III, and Julapa A. Jagtiani
Does Bank Concentration Lead to Concentration in Industrial Sectors?
Nicola Cetorelli

WP-00-31

WP-01-01

2

Working Paper Series (continued)
On the Fiscal Implications of Twin Crises
Craig Burnside, Martin Eichenbaum and Sergio Rebelo

WP-01-02

Sub-Debt Yield Spreads as Bank Risk Measures
Douglas D. Evanoff and Larry D. Wall

WP-01-03

Productivity Growth in the 1990s: Technology, Utilization, or Adjustment?
Susanto Basu, John G. Fernald and Matthew D. Shapiro

WP-01-04

Do Regulators Search for the Quiet Life? The Relationship Between Regulators and
The Regulated in Banking
Richard J. Rosen
Learning-by-Doing, Scale Efficiencies, and Financial Performance at Internet-Only Banks
Robert DeYoung
The Role of Real Wages, Productivity, and Fiscal Policy in Germany’s
Great Depression 1928-37
Jonas D. M. Fisher and Andreas Hornstein

WP-01-05

WP-01-06

WP-01-07

Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy
Lawrence J. Christiano, Martin Eichenbaum and Charles L. Evans

WP-01-08

Outsourcing Business Service and the Scope of Local Markets
Yukako Ono

WP-01-09

The Effect of Market Size Structure on Competition: The Case of Small Business Lending
Allen N. Berger, Richard J. Rosen and Gregory F. Udell

WP-01-10

Deregulation, the Internet, and the Competitive Viability of Large Banks
and Community Banks
Robert DeYoung and William C. Hunter

WP-01-11

Price Ceilings as Focal Points for Tacit Collusion: Evidence from Credit Cards
Christopher R. Knittel and Victor Stango

WP-01-12

Gaps and Triangles
Bernardino Adão, Isabel Correia and Pedro Teles

WP-01-13

A Real Explanation for Heterogeneous Investment Dynamics
Jonas D.M. Fisher

WP-01-14

Recovering Risk Aversion from Options
Robert R. Bliss and Nikolaos Panigirtzoglou

WP-01-15

Economic Determinants of the Nominal Treasury Yield Curve
Charles L. Evans and David Marshall

WP-01-16

Price Level Uniformity in a Random Matching Model with Perfectly Patient Traders
Edward J. Green and Ruilin Zhou

WP-01-17

Earnings Mobility in the US: A New Look at Intergenerational Inequality
Bhashkar Mazumder

WP-01-18

3

Working Paper Series (continued)
The Effects of Health Insurance and Self-Insurance on Retirement Behavior
Eric French and John Bailey Jones

WP-01-19

The Effect of Part-Time Work on Wages: Evidence from the Social Security Rules
Daniel Aaronson and Eric French

WP-01-20

Antidumping Policy Under Imperfect Competition
Meredith A. Crowley

WP-01-21

Is the United States an Optimum Currency Area?
An Empirical Analysis of Regional Business Cycles
Michael A. Kouparitsas

WP-01-22

A Note on the Estimation of Linear Regression Models with Heteroskedastic
Measurement Errors
Daniel G. Sullivan

WP-01-23

The Mis-Measurement of Permanent Earnings: New Evidence from Social
Security Earnings Data
Bhashkar Mazumder

WP-01-24

Pricing IPOs of Mutual Thrift Conversions: The Joint Effect of Regulation
and Market Discipline
Elijah Brewer III, Douglas D. Evanoff and Jacky So

WP-01-25

Opportunity Cost and Prudentiality: An Analysis of Collateral Decisions in
Bilateral and Multilateral Settings
Herbert L. Baer, Virginia G. France and James T. Moser

WP-01-26

Outsourcing Business Services and the Role of Central Administrative Offices
Yukako Ono

WP-02-01

Strategic Responses to Regulatory Threat in the Credit Card Market*
Victor Stango

WP-02-02

The Optimal Mix of Taxes on Money, Consumption and Income
Fiorella De Fiore and Pedro Teles

WP-02-03

Expectation Traps and Monetary Policy
Stefania Albanesi, V. V. Chari and Lawrence J. Christiano

WP-02-04

Monetary Policy in a Financial Crisis
Lawrence J. Christiano, Christopher Gust and Jorge Roldos

WP-02-05

Regulatory Incentives and Consolidation: The Case of Commercial Bank Mergers
and the Community Reinvestment Act
Raphael Bostic, Hamid Mehran, Anna Paulson and Marc Saidenberg
Technological Progress and the Geographic Expansion of the Banking Industry
Allen N. Berger and Robert DeYoung

WP-02-06

WP-02-07

4

Working Paper Series (continued)
Choosing the Right Parents: Changes in the Intergenerational Transmission
of Inequality  Between 1980 and the Early 1990s
David I. Levine and Bhashkar Mazumder

WP-02-08

The Immediacy Implications of Exchange Organization
James T. Moser

WP-02-09

Maternal Employment and Overweight Children
Patricia M. Anderson, Kristin F. Butcher and Phillip B. Levine

WP-02-10

The Costs and Benefits of Moral Suasion: Evidence from the Rescue of
Long-Term Capital Management
Craig Furfine

WP-02-11

On the Cyclical Behavior of Employment, Unemployment and Labor Force Participation
Marcelo Veracierto

WP-02-12

Do Safeguard Tariffs and Antidumping Duties Open or Close Technology Gaps?
Meredith A. Crowley

WP-02-13

Technology Shocks Matter
Jonas D. M. Fisher

WP-02-14

Money as a Mechanism in a Bewley Economy
Edward J. Green and Ruilin Zhou

WP-02-15

Optimal Fiscal and Monetary Policy: Equivalence Results
Isabel Correia, Juan Pablo Nicolini and Pedro Teles

WP-02-16

Real Exchange Rate Fluctuations and the Dynamics of Retail Trade Industries
on the U.S.-Canada Border
Jeffrey R. Campbell and Beverly Lapham

WP-02-17

Bank Procyclicality, Credit Crunches, and Asymmetric Monetary Policy Effects:
A Unifying Model
Robert R. Bliss and George G. Kaufman

WP-02-18

Location of Headquarter Growth During the 90s
Thomas H. Klier

WP-02-19

The Value of Banking Relationships During a Financial Crisis:
Evidence from Failures of Japanese Banks
Elijah Brewer III, Hesna Genay, William Curt Hunter and George G. Kaufman

WP-02-20

On the Distribution and Dynamics of Health Costs
Eric French and John Bailey Jones

WP-02-21

The Effects of Progressive Taxation on Labor Supply when Hours and Wages are
Jointly Determined
Daniel Aaronson and Eric French

WP-02-22

5

Working Paper Series (continued)
Inter-industry Contagion and the Competitive Effects of Financial Distress Announcements:
Evidence from Commercial Banks and Life Insurance Companies
Elijah Brewer III and William E. Jackson III

WP-02-23

State-Contingent Bank Regulation With Unobserved Action and
Unobserved Characteristics
David A. Marshall and Edward Simpson Prescott

WP-02-24

Local Market Consolidation and Bank Productive Efficiency
Douglas D. Evanoff and Evren Örs

WP-02-25

Life-Cycle Dynamics in Industrial Sectors. The Role of Banking Market Structure
Nicola Cetorelli

WP-02-26

Private School Location and Neighborhood Characteristics
Lisa Barrow

WP-02-27

Teachers and Student Achievement in the Chicago Public High Schools
Daniel Aaronson, Lisa Barrow and William Sander

WP-02-28

The Crime of 1873: Back to the Scene
François R. Velde

WP-02-29

Trade Structure, Industrial Structure, and International Business Cycles
Marianne Baxter and Michael A. Kouparitsas

WP-02-30

Estimating the Returns to Community College Schooling for Displaced Workers
Louis Jacobson, Robert LaLonde and Daniel G. Sullivan

WP-02-31

A Proposal for Efficiently Resolving Out-of-the-Money Swap Positions
at Large Insolvent Banks
George G. Kaufman

WP-03-01

Depositor Liquidity and Loss-Sharing in Bank Failure Resolutions
George G. Kaufman

WP-03-02

Subordinated Debt and Prompt Corrective Regulatory Action
Douglas D. Evanoff and Larry D. Wall

WP-03-03

When is Inter-Transaction Time Informative?
Craig Furfine

WP-03-04

Tenure Choice with Location Selection: The Case of Hispanic Neighborhoods
in Chicago
Maude Toussaint-Comeau and Sherrie L.W. Rhine

WP-03-05

Distinguishing Limited Commitment from Moral Hazard in Models of
Growth with Inequality*
Anna L. Paulson and Robert Townsend

WP-03-06

Resolving Large Complex Financial Organizations
Robert R. Bliss

WP-03-07

6

Working Paper Series (continued)
The Case of the Missing Productivity Growth:
Or, Does information technology explain why productivity accelerated in the United States
but not the United Kingdom?
Susanto Basu, John G. Fernald, Nicholas Oulton and Sylaja Srinivasan

WP-03-08

Inside-Outside Money Competition
Ramon Marimon, Juan Pablo Nicolini and Pedro Teles

WP-03-09

The Importance of Check-Cashing Businesses to the Unbanked: Racial/Ethnic Differences
William H. Greene, Sherrie L.W. Rhine and Maude Toussaint-Comeau

WP-03-10

A Structural Empirical Model of Firm Growth, Learning, and Survival
Jaap H. Abbring and Jeffrey R. Campbell

WP-03-11

Market Size Matters
Jeffrey R. Campbell and Hugo A. Hopenhayn

WP-03-12

The Cost of Business Cycles under Endogenous Growth
Gadi Barlevy

WP-03-13

The Past, Present, and Probable Future for Community Banks
Robert DeYoung, William C. Hunter and Gregory F. Udell

WP-03-14

Measuring Productivity Growth in Asia: Do Market Imperfections Matter?
John Fernald and Brent Neiman

WP-03-15

Revised Estimates of Intergenerational Income Mobility in the United States
Bhashkar Mazumder

WP-03-16

Product Market Evidence on the Employment Effects of the Minimum Wage
Daniel Aaronson and Eric French

WP-03-17

Estimating Models of On-the-Job Search using Record Statistics
Gadi Barlevy

WP-03-18

Banking Market Conditions and Deposit Interest Rates
Richard J. Rosen

WP-03-19

Creating a National State Rainy Day Fund: A Modest Proposal to Improve Future
State Fiscal Performance
Richard Mattoon

WP-03-20

Managerial Incentive and Financial Contagion
Sujit Chakravorti, Anna Llyina and Subir Lall

WP-03-21

Women and the Phillips Curve: Do Women’s and Men’s Labor Market Outcomes
Differentially Affect Real Wage Growth and Inflation?
Katharine Anderson, Lisa Barrow and Kristin F. Butcher

WP-03-22

Evaluating the Calvo Model of Sticky Prices
Martin Eichenbaum and Jonas D.M. Fisher

WP-03-23

7

Working Paper Series (continued)
The Growing Importance of Family and Community: An Analysis of Changes in the
Sibling Correlation in Earnings
Bhashkar Mazumder and David I. Levine

WP-03-24

Should We Teach Old Dogs New Tricks? The Impact of Community College Retraining
on Older Displaced Workers
Louis Jacobson, Robert J. LaLonde and Daniel Sullivan

WP-03-25

Trade Deflection and Trade Depression
Chad P. Brown and Meredith A. Crowley

WP-03-26

China and Emerging Asia: Comrades or Competitors?
Alan G. Ahearne, John G. Fernald, Prakash Loungani and John W. Schindler

WP-03-27

International Business Cycles Under Fixed and Flexible Exchange Rate Regimes
Michael A. Kouparitsas

WP-03-28

8