Cointegrated TFP processes and international business cycles

► Cointegrated TFP shocks are added to an otherwise standard international real business cycle model. ► The cointegration relationship is estimated from using U.S. data and a rest of the world aggregate. ► It is shown how cointegrated TFP shocks help explain real exchange rate volatility. ► The model can also explain the observed increase in real exchange rate volatility in the last 20 years.