Distribution Costs and International Business Cycles
AbstractBackus, Kehoe, and Kydland (International Real Business Cycles, JPE, 100(4),1992) documented several discrepancies between the observed post-war business cycles of developed countries and the predictions of a two-country, complete-market model. The main discrepancy termed as the â€œquantity anomalyâ€ that cross-country consumption correlations are higher than that of output in the model as opposed to data, has remained a central puzzle in international economics. In order to resolve this puzzle mainly two strategies: restrictions on asset trade, and introducing non-traded goods in the model, have been employed by researchers. While these extensions have been successful in closing the gap to some extent, the ordering of correlations has stayed unchanged: consumption correlations still exceed that of output. This paper attempts to resolve the quantity puzzle by introducing non-traded distribution costs in the retailing of traded goods. In a standard two-good model traded output and traded consumption, by definition, are identical goods. With distribution costs, traded output and consumption are two distinct entities as each unit of final traded consumption good incorporates a unit of traded good and a fixed amount of non-traded goods. Thus, effectively, the model with distribution costs can be viewed as a model without distribution costs but with a modified utility function that has a substantially stronger complementarity between traded and non-traded goods. In a simple two-good extension of the Backus, Kehoe, and Kydland model, it is shown that the cross-country consumption and output correlations are 0.55 and 0.30, respectively, whereas with distribution costs consumption correlation reduces to 0.09, output correlation to 0.23. Incorporating distribution costs, in addition, improves the modelâ€™s performance in matching the volatility of real exchange rates and the correlation of net exports with output. These improvements are achieved without sacrificing the model's performance in any other dimension.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 808.
Date of creation: 03 Dec 2006
Date of revision:
Contact details of provider:
Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC
open economy business cycles; quantity puzzle; distribution costs;
Find related papers by JEL classification:
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-01-13 (All new papers)
- NEP-DGE-2007-01-13 (Dynamic General Equilibrium)
- NEP-MAC-2007-01-13 (Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Corsetti, Giancarlo & Dedola, Luca, 2005. "A macroeconomic model of international price discrimination," Journal of International Economics, Elsevier, vol. 67(1), pages 129-155, September.
- Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
- AMBLER, Steve & CARDIA, Emanuela & ZIMMERMANN, Christian, 2000.
"International Transmission of the Business Cycle in a Multi-Sector Model,"
Cahiers de recherche
2000-06, Universite de Montreal, Departement de sciences economiques.
- Ambler, Steve & Cardia, Emanuela & Zimmermann, Christian, 2002. "International transmission of the business cycle in a multi-sector model," European Economic Review, Elsevier, vol. 46(2), pages 273-300, February.
- Steve Ambler & Emanuela Cardia & Christian Zimmermann, 1998. "International Transmission of the Business Cycle in a Multi-Sectoral Model," Cahiers de recherche CREFE / CREFE Working Papers 60, CREFE, Université du Québec à Montréal.
- Ambler, S. & Cardia, E. & Zimmermann, C., 2000. "International Transmission of the Business Cycle in a Multi-Sector Model," Cahiers de recherche 2000-06, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
- Baxter, M. & Crucini, M., 1991.
"Business Cycles and the Asset Structure of Foreign Trade,"
RCER Working Papers
316, University of Rochester - Center for Economic Research (RCER).
- Baxter, Marianne & Crucini, Mario J, 1995. "Business Cycles and the Asset Structure of Foreign Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 821-54, November.
- 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.
- Marianne Baxter & Mario J. Crucini, 1994. "Business Cycles and the Asset Structure of Foreign Trade," NBER Working Papers 4975, National Bureau of Economic Research, Inc.
- David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1987.
"International real business cycles,"
426, Federal Reserve Bank of Minneapolis.
- Patrick J. Kehoe & Fabrizio Perri, 2000.
"International business cycles with endogenous incomplete markets,"
265, Federal Reserve Bank of Minneapolis.
- Patrick J. Kehoe & Fabrizio Perri, 2002. "International Business Cycles with Endogenous Incomplete Markets," Econometrica, Econometric Society, vol. 70(3), pages 907-928, May.
- Patrick J. Kehoe & Fabrizio Perri, 2000. "International Business Cycles with Endogenous Incomplete Markets," NBER Working Papers 7870, National Bureau of Economic Research, Inc.
- Michael A. Kouparitsas, 1996. "North-South business cycles," Working Paper Series, Macroeconomic Issues WP-96-9, Federal Reserve Bank of Chicago.
- Heathcote, Jonathan & Perri, Fabrizio, 2002.
"Financial autarky and international business cycles,"
Journal of Monetary Economics,
Elsevier, vol. 49(3), pages 601-627, April.
- Heathcote, Jonathan & Perri, Fabrizio, 1999. "Financial Autarky and International Business Cycles," Working Paper Series in Economics and Finance 320, Stockholm School of Economics, revised 30 Apr 2000.
- 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.
- Robert Kollmann, 1996. "Incomplete asset markets and the cross-country consumption correlation puzzle," ULB Institutional Repository 2013/7640, ULB -- Universite Libre de Bruxelles.
- Alan C. Stockman & Linda L. Tesar, 1991.
"Tastes and technology in a two-country model of the business cycle: explaining international co-movements,"
9019, Federal Reserve Bank of Cleveland.
- 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, 1995. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," NBER Working Papers 3566, National Bureau of Economic Research, Inc.
- Christoph Thoenissen, 2006. " Real Exchange Rate Volatility and Asset Market Structure," CDMA Working Paper Series 0609, Centre for Dynamic Macroeconomic Analysis, revised Oct 2006.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.