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Productivity Shocks and Consumption Smoothing in the International Economy

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Author Info

  • Fabio Ghironi

    ()
    (Boston College)

  • Talan B. Iscan

    ()
    (Dalhousie University)

  • Alessandro Rebucci

    ()
    (International Monetary Fund)

Abstract

We develop a two-country, dynamic general equilibrium model that links cross-country differences in net foreign asset and consumption dynamics to differences in discount factors and steady-state levels of productivity. We compare the results of the model to those of VARs for the G3 economies. We identify country-specific productivity shocks by assuming that productivity does not respond contemporaneously to other variables in these VARs. We identify global productivity shocks by estimating the VARs in common trend representation after testing for and imposing model-based, long-run cointegration restrictions. We then compare the model's predictions for net foreign asset and consumption dynamics in response to productivity shocks with the estimated VAR impulse responses. We find that the two sources of heterogeneity we consider go some way toward reconciling the consumption smoothing hypothesis with the data and explaining variations in net foreign asset and consumption dynamics across countries.

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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 565.

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Length: 62 pages
Date of creation: 13 Jun 2003
Date of revision:
Handle: RePEc:boc:bocoec:565

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Keywords: net foreign assets; consumption smoothing; heterogeneity; productivity shocks;

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References

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Cited by:
  1. Bergin, Paul R., 2006. "How well can the New Open Economy Macroeconomics explain the exchange rate and current account?," Journal of International Money and Finance, Elsevier, vol. 25(5), pages 675-701, August.
  2. Fabio Ghironi, 2000. "Macroeconomic Interdependence under Incomplete Markets," Boston College Working Papers in Economics 471, Boston College Department of Economics, revised 07 Feb 2003.
  3. Ghironi, Fabio & Iscan, Talan B. & Rebucci, Alessandro, 2008. "Net foreign asset positions and consumption dynamics in the international economy," Journal of International Money and Finance, Elsevier, vol. 27(8), pages 1337-1359, December.

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