An International Economy with Country-Specific Money and Productivity Growth Processes

This paper analyses a stochastic international growth model with money and country-specific forcing processes to productivity and money growth rates. Monies are required, owing to cash-in-advance constraints for consumption goods, but the liquidity constraints need not be binding for all periods. An individual can trade claims on future currency units for both countries through government bond markets. Each country specializes in the production of one of the goods, but individual agents can invest, subject to installation costs, in any available technology. The forcing processes are calibrated to a sample of U.S. and Canadian data. An equilibrium growth solution is computed numerically using the Marcet method of parameterized expectations. The interdependence implied by the model is illustrated by a series of impulse responses. Particular attention is focused on the asymmetry of the forcing processes across countries and the interaction between the real and the nominal components of the model.