Multiple stages of processing and the quantity anomaly in international business cycle models
Abstract
We construct a two-country DSGE model with multiple stages of processing and local currency staggered price-setting to study cross-country quantity correlations driven by monetary shocks. The model embodies a mechanism that propagates a monetary surprise in the home country to lower the foreign price level while restraining the home price level from rising too quickly; and, it does so through reducing material costs in terms of the foreign currency unit while dampening the upward movements in the costs in terms of the home currency unit, both in absolute terms and relative to the costs of primary factors. We show that, through this mechanism and a resulting factor substitution effect, the model is able to generate significant cross-country quantity correlations, with correlations in consumption considerably lower than correlations in output, as in the data.Download Info
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Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 04-05.Length:
Date of creation: 2004
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Handle: RePEc:fip:fedkrw:rwp04-05
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Keywords: Welfare ; Competition ; Monopolistic competition ; Business cycles;Other versions of this item:
- Kevin X. D. Huang & Zheng Liu, 2004. "Multiple stages of processing and the quantity anomaly in international business cycle models," Working Papers 04-8, Federal Reserve Bank of Philadelphia.
- NEP-ALL-2004-08-09 (All new papers)
- NEP-DGE-2004-08-09 (Dynamic General Equilibrium)
- NEP-MAC-2004-08-09 (Macroeconomics)
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Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- Paul Gao & Kevin X.D. Huang, 2004.
"Aggregate consumption-wealth ratio and the cross-section of stock returns: some international evidence,"
Research Working Paper
RWP 04-07, Federal Reserve Bank of Kansas City.
- Paul P.J. Gao & Kevin X.D. Huang, 2008. "Aggregate Consumption-Wealth Ratio and the Cross-Section of Stock Returns: Some International Evidence," Annals of Economics and Finance, Society for AEF, vol. 9(1), pages 1-37, May.
- Huang, Kevin X.D. & Liu, Zheng, 2006. "Sellers' local currency pricing or buyers' local currency pricing: does it matter for international welfare analysis?," Journal of Economic Dynamics and Control, Elsevier, vol. 30(7), pages 1183-1213, July.
- Huang, Kevin X.D. & Liu, Zheng, 2007. "Business cycles with staggered prices and international trade in intermediate inputs," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1271-1289, May.
- Kevin X.D. Huang & Zheng Liu, 2005. "Vertical production and trade interdependence and welfare," Working Papers 05-15, Federal Reserve Bank of Philadelphia.
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