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International real business cycles with endogenous markup variability

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  • Davis, J. Scott
  • Huang, Kevin X.D.

Abstract

The aggregate impact of decisions made at the level of the individual firm has recently attracted a lot of attention in both the macro and trade literatures. We adapt the benchmark international real business cycle model to a game-theoretic environment to add a channel for the strategic interaction among domestic and foreign firms. We show how the sum of strategic pricing decisions made at the level of the individual firm can have significant effects on the volatility and cross country co-movement of GDP and its components. Specifically we show that the addition of this one channel for strategic interaction leads to a significant increase in the cross-country co-movement of production and investment, as well as a significant decrease in the volatility of investment and the trade balance over the benchmark IRBC model.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 85 (2011)
Issue (Month): 2 ()
Pages: 302-316

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Handle: RePEc:eee:inecon:v:85:y:2011:i:2:p:302-316

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Web page: http://www.elsevier.com/locate/inca/505552

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Keywords: Endogenous markup variability; International Business cycle Co-movement; International real business cycles;

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References

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  1. Cook, David, 2002. "Market entry and international propagation of business cycles," Journal of International Economics, Elsevier, vol. 56(1), pages 155-175, January.
  2. César Calderón & Alberto E. Chong & Ernesto H. Stein, 2003. "Trade Intensity and Business Cycle Synchronization: Are Developing Countries any Different?," IDB Publications 6501, Inter-American Development Bank.
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  12. Chen, Natalie & Imbs, Jean & Scott, Andrew, 2009. "The dynamics of trade and competition," Journal of International Economics, Elsevier, vol. 77(1), pages 50-62, February.
  13. Argia M. Sbordone, 2007. "Globalization and Inflation Dynamics: The Impact of Increased Competition," NBER Chapters, in: International Dimensions of Monetary Policy, pages 547-579 National Bureau of Economic Research, Inc.
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  16. Timothy J. Kehoe & Kim Ruhl, 2008. "Data Appendix to "Are Shocks to the Terms of Trade Shocks to Productivity?"," Technical Appendices 07-40, Review of Economic Dynamics.
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