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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)

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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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Publisher 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
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Handle: RePEc:boc:bocoec:565

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Related research
Keywords: net foreign assets consumption smoothing heterogeneity productivity shocks

Find related papers by JEL classification:
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Fabio Ghironi, 2000. "Macroeconomic Interdependence under Incomplete Markets," Boston College Working Papers in Economics 471, Boston College Department of Economics, revised 07 Feb 2003. [Downloadable!]
    Other versions:
  2. Fabio Ghironi & Talan B. Iscan & Alessandro Rebucci, 2005. "Net Foreign Asset Positions and Consumption Dynamics in the International Economy," IMF Working Papers 05/82, International Monetary Fund. [Downloadable!]
  3. Paul R. Bergin, 2004. "How Well Can the New Open Economy Macroeconomics Explain the Exchange Rate and Current Account?," NBER Working Papers 10356, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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