This paper examines the relationship between country spreads and business cycles in emerging market economies. It investigates whether country spreads drive business cycles or vice versa, and whether US interest rate changes affect emerging countries directly or through their impact on country spreads. Using a combination of empirical and theoretical methods, the authors find that US interest rate shocks explain about 20% of business cycle fluctuations in emerging economies, while country spread shocks explain about 12%. About 60% of movements in country spreads are explained by country spread shocks. The paper also finds that US interest rate shocks affect domestic variables primarily through their effects on country spreads. Additionally, the paper shows that country spreads respond to domestic business conditions, which significantly increases aggregate volatility in emerging economies. The study concludes that the identified shocks are plausible as they produce similar business cycle patterns in both empirical and theoretical models. The paper also highlights the importance of considering the role of world interest rates in transmitting shocks to emerging economies. The findings suggest that country spreads serve as a transmission mechanism for world interest rate changes, amplifying or dampening their effects on domestic economies. The study provides insights into the complex interplay between country spreads, US interest rates, and business cycles in emerging economies.This paper examines the relationship between country spreads and business cycles in emerging market economies. It investigates whether country spreads drive business cycles or vice versa, and whether US interest rate changes affect emerging countries directly or through their impact on country spreads. Using a combination of empirical and theoretical methods, the authors find that US interest rate shocks explain about 20% of business cycle fluctuations in emerging economies, while country spread shocks explain about 12%. About 60% of movements in country spreads are explained by country spread shocks. The paper also finds that US interest rate shocks affect domestic variables primarily through their effects on country spreads. Additionally, the paper shows that country spreads respond to domestic business conditions, which significantly increases aggregate volatility in emerging economies. The study concludes that the identified shocks are plausible as they produce similar business cycle patterns in both empirical and theoretical models. The paper also highlights the importance of considering the role of world interest rates in transmitting shocks to emerging economies. The findings suggest that country spreads serve as a transmission mechanism for world interest rate changes, amplifying or dampening their effects on domestic economies. The study provides insights into the complex interplay between country spreads, US interest rates, and business cycles in emerging economies.