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Multiple stages of processing and the quantity anomaly in international business cycle models

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  • Kevin X. D. Huang
  • Zheng Liu

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. 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.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 04-8.

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Date of creation: 2004
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Handle: RePEc:fip:fedpwp:04-8

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Keywords: Business cycles;

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Citations

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Cited by:
  1. Kevin X.D. Huang & Zheng Liu, 2005. "Vertical production and trade interdependence and welfare," Working Papers 05-15, Federal Reserve Bank of Philadelphia.
  2. 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.
  3. Kevin X. D. Huang & Zheng Liu, 2003. "Business Cycles with Staggered Prices and International Trade in Intermediate Inputs," Emory Economics 0308, Department of Economics, Emory University (Atlanta).
  4. 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.
  5. Oviedo, P. Marcelo & Singh, Rajesh, 2013. "Investment composition and international business cycles," Journal of International Economics, Elsevier, vol. 89(1), pages 79-95.

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