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International business cycles and the dynamics of the current account

  • Elliott, Graham
  • Fatas, Antonio

This paper analyses the transmission of productivity shocks across countries and how the responses of investment and the current account differ depending on the degree of propagation of the shocks. We explore both issues by estimating a structural model for Japan, the United States and Europe. We postulate, as an identifying assumption, that the propagation of shocks is proportional to trade. We find that there is a strong asymmetry in that shocks to the United States propagate quickly to the other two economies, while European and Japanese shocks have little impact on other countries' productivity. We find that productivity increases lead to domestic investment booms and current account deficits. Investment in other countries tends to react positively to productivity shocks, even when the shock is purely national. This second result contradicts the predictions of a standard open-economy model with perfect capital mobility where, in response to country-specific shocks, domestic and foreign investment should move in opposite directions. We also find quantitative differences among the three countries in the response of the current account. These differences are not related to the global or idiosyncratic nature of the shocks.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 40 (1996)
Issue (Month): 2 (February)
Pages: 361-387

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Handle: RePEc:eee:eecrev:v:40:y:1996:i:2:p:361-387
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  1. Tesar, Linda L., 1991. "Savings, investment and international capital flows," Journal of International Economics, Elsevier, vol. 31(1-2), pages 55-78, August.
  2. Reuven Glick & Kenneth Rogoff, 1993. "Global versus country-specific productivity shocks and the current account," International Finance Discussion Papers 443, Board of Governors of the Federal Reserve System (U.S.).
  3. Ahmed, S. & Ickes, B. & Wang, P. & Yoo, S., 1989. "International Business Cycles," Papers 7-89-4, Pennsylvania State - Department of Economics.
  4. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1994. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?," American Economic Review, American Economic Association, vol. 84(1), pages 84-103, March.
  5. Obstfeld, Maurice, 1986. "Capital mobility in the world economy: Theory and measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 24(1), pages 55-103, January.
  6. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
  7. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  8. Jeffrey D. Sachs, 1981. "The Current Account and macroeconomic Adjustment in the 1970s," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 201-282.
  9. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1992. "International Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 745-75, August.
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