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Agency Costs, Risk Shocks, And International Cycles

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  • Letendre, Marc-André
  • Wagner, Joel

Abstract

We add agency costs into a two-country, two-good international business-cycle model. In our model, changes in the relative price of investment arise endogenously. Despite the fact that technology shocks are uncorrelated across countries, the relative price of investment is positively correlated across countries in our model, much as it is in detrended U.S./Euro-area data. We also find that financial frictions tend to increase the volatility of the terms of trade and the international correlations of consumption, hours worked, output, and investment. We then compare this model to an alternative model that also includes risk shocks. We use credit spread data (for the United States) to calibrate the AR(1) process for risk shocks. We find that risk shocks are too small to significantly impact the model's dynamics.

Suggested Citation

  • Letendre, Marc-André & Wagner, Joel, 2018. "Agency Costs, Risk Shocks, And International Cycles," Macroeconomic Dynamics, Cambridge University Press, vol. 22(5), pages 1134-1172, July.
    • Handle: RePEc:cup:macdyn:v:22:y:2018:i:05:p:1134-1172_00
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    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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