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International real business cycles with endogenous markup variability

  • Davis, J. Scott
  • Huang, Kevin X.D.

The aggregate impact of decisions made at the level of the individual firm has recently attracted a lot of attention in both the macro and trade literatures. We adapt the benchmark international real business cycle model to a game-theoretic environment to add a channel for the strategic interaction among domestic and foreign firms. We show how the sum of strategic pricing decisions made at the level of the individual firm can have significant effects on the volatility and cross country co-movement of GDP and its components. Specifically we show that the addition of this one channel for strategic interaction leads to a significant increase in the cross-country co-movement of production and investment, as well as a significant decrease in the volatility of investment and the trade balance over the benchmark IRBC model.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 85 (2011)
Issue (Month): 2 ()
Pages: 302-316

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Handle: RePEc:eee:inecon:v:85:y:2011:i:2:p:302-316
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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  1. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Boston College Working Papers in Economics 593, Boston College Department of Economics.
  2. Marianne Baxter & Michael A. Kouparitsas, 2004. "Determinants of Business Cycle Comovement: A Robust Analysis," NBER Working Papers 10725, National Bureau of Economic Research, Inc.
  3. Choi, E. Kwan & Harrigan, James, 2003. "Handbook of International Trade," Staff General Research Papers 11375, Iowa State University, Department of Economics.
  4. 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.
  5. Natalie Chen & Jean Imbs & Andrew Scott, 2006. "The dynamics of trade and competition," Working Paper Research 91, National Bank of Belgium.
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  8. Ananth Ramanarayanan & Costas Arkolakis, 2009. "Vertical Specialization and International Business Cycle Synchronization," 2009 Meeting Papers 780, Society for Economic Dynamics.
  9. Konings, Jozef & Vandenbussche, Hylke, 2005. "Antidumping protection and markups of domestic firms," Journal of International Economics, Elsevier, vol. 65(1), pages 151-165, January.
  10. Cook, David, 2002. "Market entry and international propagation of business cycles," Journal of International Economics, Elsevier, vol. 56(1), pages 155-175, January.
  11. Timothy J. Kehoe & Kim Ruhl, 2008. "Data Appendix to "Are Shocks to the Terms of Trade Shocks to Productivity?"," Technical Appendices 07-40, Review of Economic Dynamics.
  12. Hafedh Bouakez, 2002. "Nominal Rigidity, Desired Markup Variations, and Real Exchange Rate Persistence," Working Papers 02-26, Bank of Canada.
  13. Heathcote, Jonathan & Perri, Fabrizio, 1999. "Financial Autarky and International Business Cycles," SSE/EFI Working Paper Series in Economics and Finance 320, Stockholm School of Economics, revised 30 Apr 2000.
  14. Argia M. Sbordone, 2007. "Globalization and Inflation Dynamics: The Impact of Increased Competition," NBER Chapters, in: International Dimensions of Monetary Policy, pages 547-579 National Bureau of Economic Research, Inc.
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  16. Christopher Gust & Sylvain Leduc & Robert Vigfusson, 2006. "Trade Integration, Competiton, and the Decline in Exchange-rate Pass-through," 2006 Meeting Papers 165, Society for Economic Dynamics.
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