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Capital Accumulation, Non-traded Goods and International Macroeconomic Dynamics with Heterogeneous Firms

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  • Daniel Farhat

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    (Department of Economics, University of Otago)

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    Abstract

    This paper examines international business cycle transmission within a two-country dynamic stochastic general equilibrium model featuring an endogenously determined trade pattern. In contrast to existing literature, this model distinguishes between non-traded final goods and traded inputs. The model incorporates capital into the production of final goods and shows that shocks to final goods production are important in replicating the empirical regularities of imports, exports, the real exchange rate and their relationship to GDP. Endogenously determined labour supply and high asset market frictions are incorporated into the model to improve the modelÕs ability to replicate labour market statistics and international co-movement.

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    File URL: http://www.business.otago.ac.nz/econ/research/discussionpapers/DP_1002.pdf
    File Function: First version, 2010
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    Bibliographic Info

    Paper provided by University of Otago, Department of Economics in its series Working Papers with number 1002.

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    Length: 29 pages
    Date of creation: May 2010
    Date of revision: May 2010
    Handle: RePEc:otg:wpaper:1002

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    Keywords: International Real Business Cycles; Non-traded Final Goods; Imperfect Competition; International Trade;

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    1. Fabio Ghironi & Marc J. Melitz, 2005. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," The Quarterly Journal of Economics, MIT Press, vol. 120(3), pages 865-915, August.
    2. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1994. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?," American Economic Review, American Economic Association, vol. 84(1), pages 84-103, March.
    3. Cook, David, 2002. "Market entry and international propagation of business cycles," Journal of International Economics, Elsevier, vol. 56(1), pages 155-175, January.
    4. Marianne Baxter & Mario J. Crucini, 1992. "Business cycles and the asset structure of foreign trade," Discussion Paper / Institute for Empirical Macroeconomics 59, Federal Reserve Bank of Minneapolis.
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    6. Riccardo Fiorito & Giulio Zanella, 2008. "Labor Supply Elasticities: Can Micro Be Misleading for Macro?," Department of Economics University of Siena 547, Department of Economics, University of Siena.
    7. James H. Stock & Mark W. Watson, 2003. "Understanding Changes in International Business Cycle Dynamics," NBER Working Papers 9859, National Bureau of Economic Research, Inc.
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    10. Kollmann, Robert, 1996. "Incomplete asset markets and the cross-country consumption correlation puzzle," Journal of Economic Dynamics and Control, Elsevier, vol. 20(5), pages 945-961, May.
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    12. Kei-Mu Yi & M. Ayhan Kose, 2005. "Can the Standard International Business Cycle Model Explain the Relation Between Trade and Comovement?," IMF Working Papers 05/204, International Monetary Fund.
    13. Alan C. Stockman & Lars E.O. Svensson, 1985. "Capital Flows, Investment, and Exchange Rates," NBER Working Papers 1598, National Bureau of Economic Research, Inc.
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    17. Shin-ichi Fukuda, 1998. "Extraneous Shocks and International Linkage of Business Cycles in a Two-Country Monetary Model," CIRJE F-Series CIRJE-F-16, CIRJE, Faculty of Economics, University of Tokyo.
    18. 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.
    19. Zimmermann, Christian, 1999. "International Business Cycles and Exchange Rates," Review of International Economics, Wiley Blackwell, vol. 7(4), pages 682-98, November.
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    22. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
    23. Xiao, Wei, 2004. "Can indeterminacy resolve the cross-country correlation puzzle?," Journal of Economic Dynamics and Control, Elsevier, vol. 28(12), pages 2341-2366, December.
    24. Canova, Fabio & Dellas, Harris, 1993. "Trade interdependence and the international business cycle," Journal of International Economics, Elsevier, vol. 34(1-2), pages 23-47, February.
    25. Elhanan Helpman & Paul Krugman, 1987. "Market Structure and Foreign Trade: Increasing Returns, Imperfect Competition, and the International Economy," MIT Press Books, The MIT Press, edition 1, volume 1, number 026258087x, December.
    26. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
    27. Guo, Jang-Ting & Sturzenegger, Federico, 1998. "Crazy Explanations of International Business Cycles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(1), pages 111-33, February.
    28. Allen C. Head, 2002. "Aggregate Fluctuations with National and International Returns to Scale," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(4), pages 1101-1125, November.
    29. Dellas, Harris, 1986. "A real model of the world business cycle," Journal of International Money and Finance, Elsevier, vol. 5(3), pages 381-394, September.
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