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Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements

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  • Stockman, Alan C
  • Tesar, Linda L

Abstract

Trade on international financial markets allows people to insure country-specific risk and smooth consumption intertemporally. Equilibrium models of business cycles with trade on global financial markets typically yield international consumption correlations near one and excessive volatility of investment. The authors incorporate nontraded goods in the model and find that the implications for aggregate consumption, investment, and the trade balance are consistent with business-cycle properties of industrialized countries. However, the model driven by technology shocks alone yields counterfactual implications for comovements between consumption and prices at the sectoral level. Taste shocks produce price-quantity relationships more consistent with the data. Copyright 1995 by American Economic Association.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 85 (1995)
Issue (Month): 1 (March)
Pages: 168-85

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Handle: RePEc:aea:aecrev:v:85:y:1995:i:1:p:168-85

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References

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  1. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 9-22.
  2. Ahmed, S. & Ickes, B. & Wang, P. & Yoo, S., 1989. "International Business Cycles," Papers 7-89-4, Pennsylvania State - Department of Economics.
  3. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
  4. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
  5. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
  6. Baxter, Marianne & Crucini, Mario J, 1993. "Explaining Saving-Investment Correlations," American Economic Review, American Economic Association, vol. 83(3), pages 416-36, June.
  7. Sven W. Arndt & J. David Richardson, 1988. "Real-Financial Linkages Among Open Economies," NBER Working Papers 2230, National Bureau of Economic Research, Inc.
  8. Alan C. Stockman, 1978. "A Theory of Exchange Rate Determination," UCLA Economics Working Papers 122, UCLA Department of Economics.
  9. Irving B. Kravis & Robert E. Lipsey, 1991. "The International Comparison Program: Current Status and Problems," NBER Chapters, in: International Economic Transactions: Issues in Measurement and Empirical Research, pages 437-468 National Bureau of Economic Research, Inc.
  10. John Kennan, 1988. "Equilibrium Interpretations of Employment and Real Wage Fluctuations," NBER Chapters, in: NBER Macroeconomics Annual 1988, Volume 3, pages 157-216 National Bureau of Economic Research, Inc.
  11. Dellas, Harris, 1986. "A real model of the world business cycle," Journal of International Money and Finance, Elsevier, vol. 5(3), pages 381-394, September.
  12. Kravis, Irving B & Heston, Alan W & Summers, Robert, 1978. "Real GDP per Capita for More Than One Hundred Countries," Economic Journal, Royal Economic Society, vol. 88(350), pages 215-42, June.
  13. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  14. Baxter, M. & Stockman, A.C., 1988. "Business Cycles And The Exchange Rate System: Some International Evidence," RCER Working Papers 140, University of Rochester - Center for Economic Research (RCER).
  15. Gerlach, H M Stefan, 1988. "World Business Cycles under Fixed and Flexible Exchange Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(4), pages 621-32, November.
  16. Irving B. Kravis & Robert E. Lipsey, 1988. "The Assessment of National Price Levels," NBER Working Papers 1912, National Bureau of Economic Research, Inc.
  17. Heston, Alan & Summers, Robert, 1988. "What We Have Learned about Prices and Quantities from International Comparisons: 1987," American Economic Review, American Economic Association, vol. 78(2), pages 467-73, May.
  18. F. J.M. Meyer-zu-Schlochtern, 1988. "An International Sectoral Data Base for Thirteen OECD Countries," OECD Economics Department Working Papers 57, OECD Publishing.
  19. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
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  1. > Macroeconomics > Economic Fluctuations > Real Business Cycle Theory > International RBC
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