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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.

Suggested Citation

  • Raffo, Andrea, 2010. "Technology Shocks: Novel Implications for International Business Cycles," CEPR Discussion Papers 7980, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:7980
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    More about this item

    Keywords

    Backus-smith puzzle; Investment-specific technology shocks; International business cycles;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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