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The High Cross-Country Correlations of Prices and Interest Rates

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  • Henriksen, Espen
  • Kydland, Finn
  • Sustek, Roman

Abstract

We document that, at business cycle frequencies, fluctuations in nominal variables, such as aggregate price levels and nominal interest rates, are substantially more synchronized across countries than fluctuations in real output. To the extent that domestic nominal variables are determined by domestic monetary policy, and central banks generally attempt to keep the domestic nominal environment stable, this might seem surprising. We ask if a parsimonious international business cycle model can account for this aspect of cross-country aggregate fluctuations. It can. Due to spillovers of technology shocks across countries, expected future responses of national central banks to fluctuations in domestic output and inflation generate movements in current prices and interest rates that are synchronized across countries even when output is not. Even modest spillovers produce cross-country correlations such as those in the data.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 10963.

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Date of creation: 12 Sep 2008
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Handle: RePEc:pra:mprapa:10963

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Keywords: International business cycles; prices; interest rates;

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Cited by:
  1. Vo Phuong Mai Le & Patrick Minford & Michael Wickens, 2009. " The ‘Puzzles’ Methodology: En Route to Indirect Inference?," CDMA Conference Paper Series 0903, Centre for Dynamic Macroeconomic Analysis.
  2. Neely, Christopher J. & Rapach, David E., 2011. "International comovements in inflation rates and country characteristics," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1471-1490.
  3. Mumtaz, Haroon & Simonelli, Saverio & Surico, Paolo, 2009. "International comovements, business cycle and inflation: a historical perspective," Discussion Papers 28, Monetary Policy Committee Unit, Bank of England.
  4. Saverio Simonelli & Haroon Mumtaz & Paolo Surico, 2009. "A Historical Perspective on International Co-movements: 1821-2007," 2009 Meeting Papers 523, Society for Economic Dynamics.
  5. Sustek, Roman, 2010. "Monetary aggregates and the business cycle," Journal of Monetary Economics, Elsevier, vol. 57(4), pages 451-465, May.
  6. Roman Sustek, 2011. "Monetary Business Cycle Accounting," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(4), pages 592-612, October.
  7. Le, Vo Phuong Mai & Minford, Patrick & Wickens, Michael R., 2010. "Some Problems in the Testing of DSGE Models," CEPR Discussion Papers 7621, C.E.P.R. Discussion Papers.

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