This paper examines the interplay between country spreads and US interest rates in driving business cycles in emerging market economies. The authors use a combination of empirical and theoretical methods to analyze the data. Key findings include: 1. **US Interest Rate Shocks**: US interest rate shocks explain about 20% of the movements in aggregate activity in emerging countries at the business cycle frequency. 2. **Country Spread Shocks**: Country spread shocks explain about 12% of business cycle movements in emerging economies. 3. **Country Spread Dynamics**: About 60% of movements in country spreads are explained by country-spread shocks. 4. **Response to US Interest Rate Changes**: In response to an increase in US interest rates, country spreads initially fall and then display a large, delayed overshooting. 5. **Impact on Domestic Variables**: US-interest-rate shocks affect domestic variables mostly through their effects on country spreads. 6. **Volatility Exacerbation**: The response of country spreads to business conditions in emerging economies significantly exacerbates aggregate volatility in these countries. The paper also develops a theoretical model to assess the plausibility of the identified shocks, showing that the identified shocks imply similar business cycles in both empirical and theoretical models. The findings suggest that both US interest rates and country spreads play significant roles in driving business cycles in emerging markets.This paper examines the interplay between country spreads and US interest rates in driving business cycles in emerging market economies. The authors use a combination of empirical and theoretical methods to analyze the data. Key findings include: 1. **US Interest Rate Shocks**: US interest rate shocks explain about 20% of the movements in aggregate activity in emerging countries at the business cycle frequency. 2. **Country Spread Shocks**: Country spread shocks explain about 12% of business cycle movements in emerging economies. 3. **Country Spread Dynamics**: About 60% of movements in country spreads are explained by country-spread shocks. 4. **Response to US Interest Rate Changes**: In response to an increase in US interest rates, country spreads initially fall and then display a large, delayed overshooting. 5. **Impact on Domestic Variables**: US-interest-rate shocks affect domestic variables mostly through their effects on country spreads. 6. **Volatility Exacerbation**: The response of country spreads to business conditions in emerging economies significantly exacerbates aggregate volatility in these countries. The paper also develops a theoretical model to assess the plausibility of the identified shocks, showing that the identified shocks imply similar business cycles in both empirical and theoretical models. The findings suggest that both US interest rates and country spreads play significant roles in driving business cycles in emerging markets.