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Real Interest Rates and Productivity Shocks : Why Are Business Cycles Negatively Correlated Between the European Union and Jordan?

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  • BERND LUCKE
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    Why is there a negative correlation between business cycles in Jordan and the EU15? This paper explores the hypothesis that total factor productivity (TFP) increases in Europe spill over to Jordan only if embodied in foreign direct investment, but that European TFP growth negatively affects the Jordanian economy through higher world interest rates. This unambiguously lowers Tobin's q and has a negative income effect if net foreign asset holdings are negative. A dynamic stochastic equilibrium business cycle model is used to quantify the importance of this transmission channel. Simulations with observed exogenous impulses suggest a reasonably good performance of the model economy, but real interest rate shocks alone are too weak to account for the negative correlation. However, in conjunction with oil price-related shocks to transfers and the government share, the puzzle may be resolved.

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    File URL: http://hdl.handle.net/10.1080/1540496X.2004.11052594
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    Article provided by Taylor & Francis Journals in its journal Emerging Markets Finance and Trade.

    Volume (Year): 40 (2004)
    Issue (Month): 6 (November)
    Pages: 82-94

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    Handle: RePEc:taf:emfitr:v:40:y:2004:i:6:p:82-94
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    1. Zimmermann, Christian, 1997. "International real business cycles among heterogeneous countries," European Economic Review, Elsevier, vol. 41(2), pages 319-356, February.
    2. Backus, David K & Kehoe, Patrick J, 1992. "International Evidence of the Historical Properties of Business Cycles," American Economic Review, American Economic Association, vol. 82(4), pages 864-888, September.
    3. Schmitt-Grohe, Stephanie, 1998. "The international transmission of economic fluctuations:: Effects of U.S. business cycles on the Canadian economy," Journal of International Economics, Elsevier, vol. 44(2), pages 257-287, April.
    4. 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 745-775, August.
    5. Correia, Isabel & Neves, Joao C. & Rebelo, Sergio, 1995. "Business cycles in a small open economy," European Economic Review, Elsevier, vol. 39(6), pages 1089-1113, June.
    6. Artis, Michael J & Zhang, W, 1997. "International Business Cycles and the ERM: Is There a European Business Cycle?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 2(1), pages 1-16, January.
    7. Blankenau, William & Ayhan Kose, M. & Yi, Kei-Mu, 2001. "Can world real interest rates explain business cycles in a small open economy?," Journal of Economic Dynamics and Control, Elsevier, vol. 25(6-7), pages 867-889, June.
    8. Baxter, Marianne & Crucini, Mario J, 1993. "Explaining Saving-Investment Correlations," American Economic Review, American Economic Association, vol. 83(3), pages 416-436, June.
    9. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-417, June.
    10. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
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