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Productivity Growth and the Trade Balance in the 1990s: the Role of Evolving Perceptions

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Author Info

  • Luca Guerrieri
  • Christopher Erceg

Abstract

This paper examines the importance of productivity shocks in accounting for salient features of U.S. economic developments during the second half of the 1990s, including the surge in investment spending, the substantial deterioration of the trade balance, and the modest decline in inflation. We calibrate a two-country dynamic general equilibrium model and show that agents' perceptions regarding the permanence of the shocks that occurred in the late 1990s are crucial in accounting for these developments. Within a signal extraction framework, we attempt to match survey data on long-term projected output growth. Our calibrated model can account for about two-thirds of the rise in the investment share of output, and over half of the deterioration in the trade balance over this period

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 719.

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Date of creation: 2004
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Handle: RePEc:red:sed004:719

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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Web page: http://www.EconomicDynamics.org/society.htm
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Related research

Keywords: International Business Cycle; Technology Shocks; Trade Balance;

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Cited by:
  1. Charles Engel & John H. Rogers, 2006. "The U.S. current account deficit and the expected share of world output," International Finance Discussion Papers 856, Board of Governors of the Federal Reserve System (U.S.).

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