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Substitution Elasticities and Investment Dynamics in Two-Country Business Cycle Models

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  • Pakko Michael R.

    ()
    (Federal Reserve Bank of Saint Louis)

Abstract

Two-country applications of equilibrium business cycle methodology have succeeded in matching some key features of international fluctuations. However, discrepancies between theory and data remain. This paper identifies an anomaly related to a basic property of typical models: The prediction of countercyclical net exports is fundamentally related to a counterfactual implication for negative cross-country investment correlations. The introduction of investment adjustment costs can induce positive investment comovement; however, this has the side-effect of reversing the cyclical behavior of net exports. The calibration of a low elasticity of substitution between domestic goods and imports is shown to be a more robust specification with regard to this and other puzzles that have arisen in the international business cycle literature.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 3 (2003)
Issue (Month): 1 (November)
Pages: 1-20

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Handle: RePEc:bpj:bejmac:v:topics.3:y:2003:i:1:n:14

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  1. Cantor, Richard & Mark, Nelson C, 1988. "The International Transmission of Real Business Cycles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(3), pages 493-507, August.
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Cited by:
  1. Yi Wen, 2005. "By force of demand: explaining international comovements and the saving-investment correlation puzzle," Working Papers 2005-043, Federal Reserve Bank of St. Louis.
  2. Andrea Raffo, 2006. "Net Exports, Consumption Volatility and International Real Business Cycle Models," 2006 Meeting Papers 128, Society for Economic Dynamics.
  3. Wen, Yi, 2007. "By force of demand: Explaining international comovements," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 1-23, January.
  4. Nuntramas, Phacharaphot, 2011. "Revisiting the consumption-real exchange rate anomaly in a model with non-traded goods," Journal of International Money and Finance, Elsevier, vol. 30(3), pages 428-447, April.

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