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Technology Shocks: Novel Implications for International Business Cycles

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  • Andrea Raffo

    (Board of Governors of the Federal Reserve System)

Abstract

This paper studies the effects of neutral and investment-specific technology shocks in a standard international business cycle model. When investment-specific shocks explain a large fraction of fluctuations, as recently suggested by the empirical literature, our theoretical framework can account quantitatively for 1) the negative correlation between real exchange rates and relative consumption (Backus-Smith puzzle) 2) the negative correlation between terms of trade and relative output and 3) the large volatility of the terms of trade and trade flows. The main insight of this exercise is that investment-specific technology shocks in a open economy generate effects similar to taste-shocks: they raise production and domestic prices together with an appreciation of the terms of trade and large inflows of foreign goods. Our findings entail a reconsideration of the international transmission of technology shocks: the reponse of international prices depends critically on the type of technology shocks.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 511.

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Date of creation: 2008
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Handle: RePEc:red:sed008:511

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Citations

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Cited by:
  1. Gao, Xiaodan & Hnatkovska, Viktoria & Marmer, Vadim, 2012. "Limited Participation in International Business Cycle Models: A Formal Evaluation," Microeconomics.ca working papers vadim_marmer-2012-1, Vancouver School of Economics, revised 21 Dec 2013.
  2. Martin Bodenstein, 2009. "Trade Elasticity of Substitution and Equilibrium Dynamics," 2009 Meeting Papers 766, Society for Economic Dynamics.
  3. Coeurdacier, Nicolas & Kollmann, Robert & Martin, Philippe, 2008. "International Portfolios, Capital Accumulation and Foreign Assets Dynamics," CEPR Discussion Papers 6902, C.E.P.R. Discussion Papers.
  4. Pau Rabanal & Juan Francisco Rubio-Ramirez & Vicente Tuesta Reátegui, 2010. "Cointegrated TFP Processes and International Business Cycles," Working Papers 10-11, Duke University, Department of Economics.
  5. Punnoose Jacob & Gert Peersman, 2012. "Dissecting the dynamics of the US trade balance in an estimated equilibrium model," Working Paper Research 226, National Bank of Belgium.
  6. Federico S. Mandelman & Pau Rabanal & Juan F. Rubio-Ramírez & Diego Vilán, 2010. "Investment-specific technology shocks and international business cycles: an empirical assessment," Working Paper 2010-03, Federal Reserve Bank of Atlanta.
  7. Martinez-Garcia, Enrique & Sondergaard, Jens, 2009. "The real exchange rate in sticky-price models: does investment matter?," Bank of England working papers 368, Bank of England.
  8. Karabarbounis, Loukas, 2010. "Labor wedges and open economy puzzles," MPRA Paper 31370, University Library of Munich, Germany.
  9. Hakon Tretvoll, 2012. "Real exchange rate variability in a two country business cycle model," 2012 Meeting Papers 911, Society for Economic Dynamics.

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