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Technology shocks: novel implications for international business cycles

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  • Andrea Raffo

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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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 992.

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Date of creation: 2010
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Handle: RePEc:fip:fedgif:992

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Keywords: Business cycles ; International trade;

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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. Federico S. Mandelman & Pau Rabanal & Juan F. Rubio-Ramírez & Diego Vilán, 2010. "Investment-specific technology shocks and international business cycles: an empirical assessment," Working Paper 2010-03, Federal Reserve Bank of Atlanta.
  3. Punnoose Jacob & Gert Peersman, 2012. "Dissecting the dynamics of the US trade balance in an estimated equilibrium model," Working Paper Research 226, National Bank of Belgium.
  4. Vicente Tuesta & Juan F. Rubio-Ramirez & Pau Rabanal, 2009. "Cointegrated TFP Processes and International Business Cycles," IMF Working Papers 09/212, International Monetary Fund.
  5. Martin Bodenstein, 2009. "Trade Elasticity of Substitution and Equilibrium Dynamics," 2009 Meeting Papers 766, Society for Economic Dynamics.
  6. Gao, Xiaodan & Hnatkovska, Viktoria & Marmer, Vadim, 2014. "Limited participation in international business cycle models: A formal evaluation," Journal of Economic Dynamics and Control, Elsevier, vol. 39(C), pages 255-272.
  7. 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.
  8. Hakon Tretvoll, 2012. "Real exchange rate variability in a two country business cycle model," 2012 Meeting Papers 911, Society for Economic Dynamics.
  9. Karabarbounis, Loukas, 2010. "Labor wedges and open economy puzzles," MPRA Paper 31370, University Library of Munich, Germany.

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