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Technology Shocks: Novel Implications for International Business Cycles

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  • Raffo, Andrea

Abstract

Understanding the joint dynamics of international prices and quantities remains a central issue in international business cycles. International relative prices appreciate when domestic consumption and output increase more than their foreign counterparts. In addition, both trade flows and trade prices display sizable volatility. This paper incorporates Hicks-neutral and investment-specific technology shocks into a standard two-country general equilibrium model with variable capacity utilization and weak wealth effects on labor supply. Investment-specific technology shocks introduce a source of fluctuations in absorption similar to taste shocks, thus reconciling theory and data. The paper also presents implications for the transmission mechanism of technology shocks across countries and for the Barro and King (1984) critique of investment shocks.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7980.

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Date of creation: Sep 2010
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Handle: RePEc:cpr:ceprdp:7980

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Keywords: Backus-Smith puzzle; International business cycles; Investment-specific technology shocks;

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References

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Citations

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Cited by:
  1. Coeurdacier, Nicolas & Kollmann, Robert Miguel W. K. & Martin, Philippe J., 2008. "International portfolios, capital accumulation and foreign assets dynamics," Discussion Paper Series 1: Economic Studies 2008,19, Deutsche Bundesbank, Research Centre.
  2. Martinez-Garcia, Enrique & Sondergaard, Jens, 2009. "The real exchange rate in sticky-price models: does investment matter?," Bank of England working papers 368, Bank of England.
  3. Vicente Tuesta & Juan F. Rubio-Ramirez & Pau Rabanal, 2009. "Cointegrated TFP Processes and International Business Cycles," IMF Working Papers 09/212, International Monetary Fund.
  4. Hakon Tretvoll, 2012. "Real exchange rate variability in a two country business cycle model," 2012 Meeting Papers, Society for Economic Dynamics 911, Society for Economic Dynamics.
  5. Pau Rabanal & Juan Rubio-Ramirez & Diego Vilan & Federico Mandelman, 2010. "Investment-Specific Technology Shocks and International Business Cycles: An Empirical Assessment," 2010 Meeting Papers 1175, Society for Economic Dynamics.
  6. Martin Bodenstein, 2009. "Trade Elasticity of Substitution and Equilibrium Dynamics," 2009 Meeting Papers, Society for Economic Dynamics 766, Society for Economic Dynamics.
  7. Punnoose Jacob & Gert Peersman, 2012. "Dissecting the dynamics of the US trade balance in an estimated equilibrium model," Working Paper Research, National Bank of Belgium 226, National Bank of Belgium.
  8. Gao, Xiaodan & Hnatkovska, Viktoria & Marmer, Vadim, 2012. "Limited Participation in International Business Cycle Models: A Formal Evaluation," Microeconomics.ca working papers, Vancouver School of Economics vadim_marmer-2012-1, Vancouver School of Economics, revised 21 Dec 2013.
  9. Karabarbounis, Loukas, 2010. "Labor wedges and open economy puzzles," MPRA Paper 31370, University Library of Munich, Germany.

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