diminished over the past twenty years. in this sense, the observed moderation of business cycles since the 1980s can be seen as the result of good luck. however, as a consequence, it is possible that we may experience an increase in volatility again, if we run out of luck. besides volatility, there is a second characteristic of recent business cycles that deserves attention : international co - movement - or synchronization - of cycles. business cycles in modern economies tend to move together. for example, the rate of correlation between the us and dutch growth rates varies between 0. 4 and 0. 5, since 1960. an extensively studied question has been whether there has been an increase in the amount of synchronization of business cycles. in general, the available evidence indicates that there is no overall tendency towards closer synchronization or co - movement, over the past quarter century. however, at a more detailed level, the picture is different. there are cases of increased synchronization within groups or pairs of countries. for example, within the group of euro area countries, synchronization has become closer since the nineteen - eighties. moreover, in the latest cycle, correlation between us and dutch growth rates has increased significantly, to a value of 0. 65. from this, we may conclude that dutch and us growth rates have become more synchronized in the most recent cycle. in general, there are two sources for co - movement of economies. first, it is clear that general shocks to the economy, which affect many countries, lead to correlated national economic developments. this reflects a common reaction of more or less comparable countries to the same exogenous factor. examples are energy price shocks, or major developments in technology. second, in addition to common shocks, country - specific shocks are important, to the extent that they spill over to other countries. spill overs of shocks require economic linkages between countries, like trade and financial flows. hence, stronger linkages raise the probability of co - movement. for example, an increase in economic activity in one country boosts activity in its trading partners because of higher foreign demand. more recently, another transmission channel between countries has increased in importance : foreign direct investment, or fdi. several factors have contributed to the strong increase of fdi flows since the mid - nineties, like the liberalization of capital flows, reduced trade barriers and the widespread use of ict - technologies. interestingly, results from empirical analysis at

volatile cyclical growth pattern. another indication is given by the rise in the standard deviation of growth rates. this measure of volatility has almost doubled over the last four years, compared to the four years before. for a significant part, the comparative strength of the upturn and the severity of the downturn in the netherlands can be attributed to the open character of the dutch economy. the spectacular growth of world trade since 1995 and the declining exchange rate of the euro have boosted exports. the downturn that followed had an opposite and - again comparatively strong effect on the dutch economy. however, more can be said about the latest dutch business cycle - i will return to that later. first, we should take a view from a longer term, more global perspective. although the volatility of economic growth during the latest dutch business cycle was higher than before, the long term, global pattern is very different. since a long time, at least since 1960, but even more pronounced since 1980, the volatility of gdp growth [ measured by the standard deviation ] has shown a downward trend. in other words, from a longer term perspective, the business cycle has become more stable. all g7 economies, as well as the dutch economy, have become more stable. this increasing stabilization has been labelled by economists as ‘ the great moderation ’, especially with respect to the us economy. to give a quantitative illustration, the standard deviation of quarterly growth rates in the netherlands was 2. 4 % in the 1980s ; over the period since 1990 it has fallen to 1. 4 %. similar figures have been found for the us. extensive research has been devoted to an explanation for this moderation of the business cycle over the past twenty years. there are two explanations which i would like to focus on in this speech. the first explanation that has been proposed is structural change. this explanation suggests that there have been improvements in the ability of modern economies to absorb shocks. for example, due to improved methods of inventory management, there are less severe fluctuations in inventory stocks. other examples are deregulation of financial markets, and the improved resilience and strength of the financial sector. financial institutions are more able to diversify their risks, both internationally and among types of financial products. therefore, the supply of credit to the private sector has become more sophisticated, enhancing the ability of firms to smooth their activity during the business cycle. second, economic research convincingly shows that the number and size of shocks hitting economies has