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By force of demand: explaining international comovements and the saving-investment correlation puzzle

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Yi Wen

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Abstract

This paper explores the possibility that economic fluctuations may be largely demand-driven. It is shown that the stylized open-economy business cycle regularities documented by Feldstein and Horioka (1980) and Backus, Kehoe and Kydland (1992) can be explained by demand shocks alone even in a standard general equilibrium model. Frictions such as market incompleteness, increasing returns to scale, and sticky prices do not appear to be the preconditions for resolving these long-standing puzzles.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2005-043.

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Date of creation: 2005
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Handle: RePEc:fip:fedlwp:2005-043

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Keywords: Business cycles ; Saving and investment;

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