Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements
AbstractThis paper studies the international transmission of business cycles by developing a two-country real business-cycle model and confronting it with a broad set of empirical observations. These observations include variances and covariances of output, labor, consumption, employment, and investment in traded and nontraded sectors of the economy, cross-country correlations of output and consumption, and correlations between quantities and relative prices. We find that technology shocks as measured by observed total factor productivity (by sector) must be supplemented by other sources of disturbances to explain certain features of the data. We call these other disturbances taste shocks, though they may stand in for some other shocks. In particular, it is difficult to explain the observed comovements of the relative price of nontraded to traded goods with the relative consumption of those goods without invoking something like taste shocks. Our model is roughly consistent with a broad set of observations, though puzzles emerge regarding the correlation of nontraded-sector output with its relative price and the variance of the balance of trade.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3566.
Date of creation: Dec 1990
Date of revision:
Publication status: published as American Economic Review, vol 85, no. 1, pp. 168-185, (March 1995)
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- Stockman, Alan C & Tesar, Linda L, 1995. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," American Economic Review, American Economic Association, vol. 85(1), pages 168-85, March.
- Alan C. Stockman & Linda L. Tesar, 1991. "Tastes and technology in a two-country model of the business cycle: explaining international co-movements," Working Paper 9019, Federal Reserve Bank of Cleveland.
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