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Reexamination of Real Business Cycles in a Small Open Economy

Author

Listed:
  • Jang-Ting Guo

    () (Department of Economics, 4128 Sproul Hall, University of California, Riverside, Riverside, CA 92521, USA)

  • Zuzana Janko

    () (Department of Economics, University of Calgary, 2500 University Drive NW, Calgary, Alberta, Canada T2N 1N4)

Abstract

Standard dynamic small open economy models have predicted a counterfactual perfectly positive correlation between output and hours worked over the business cycle. In addition, this class of models exhibits a weak internal propagation mechanism. To address these anomalies, this paper incorporates intertemporally non-separable labor supply and variable capital utilization into the canonical Mendoza (1991) model with adjustment costs of net investment. Our analysis shows that a dynamic, technology shock–driven small open economy model with internal habit formation in labor hours and endogenous capital utilization is able to account for the main real business cycle regularities of Canada after 1981.

Suggested Citation

  • Jang-Ting Guo & Zuzana Janko, 2009. "Reexamination of Real Business Cycles in a Small Open Economy," Southern Economic Journal, Southern Economic Association, vol. 76(1), pages 165-182, July.
  • Handle: RePEc:sej:ancoec:v:76:1:y:2009:p:165-182
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    File URL: http://dx.doi.org/10.4284/sej.2009.76.1.165
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    Cited by:

    1. Jang‐Ting Guo & Alan Krause, 2011. "Optimal Nonlinear Income Taxation with Habit Formation," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 13(3), pages 463-480, June.

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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