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Endogenous fluctuations and international business cycles

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  • Stephen McKnight
  • Laura Povoledo

Abstract

We introduce equilibrium indeterminacy into a two‐country incomplete asset model with imperfect competition to analyze the role of self‐fulfilling expectations or beliefs in explaining international business cycles. We find that, when self‐fulfilling beliefs are correlated with technology shocks, the model can account for the countercyclical behaviour observed for the terms of trade and real net exports while simultaneously generating higher volatilities relative to output, as in the data. The choice of the labour‐supply elasticity is shown to be critical for generating a negative correlation between the real exchange rate and relative consumption, thereby resolving the Backus–Smith puzzle. Fluctuations endogènes et cycles économiques internationaux. Afin d'analyser le rôle des anticipations ou croyances autoréalisatrices pour expliquer les cycles économiques internationaux, nous introduisons une indétermination de l'équilibre dans un modèle d'actifs à deux pays avec concurrence imparfaite. Nous constatons que lorsque les croyances autoréalisatrices sont liées à des chocs technologiques, le modèle peut tenir compte du comportement anticyclique observé pour les termes de l'échange (terms of trade) et les exportations nettes réelles (real net exports) tout en générant de plus grandes volatilités par rapport à la production, conformément aux données. L'élasticité de l'offre de main‐d'oeuvre s'avère être un choix essentiel pour générer une corrélation négative entre le taux de change réel et la consommation relative, ce qui permet de résoudre l'énigme de Backus‐Smith.

Suggested Citation

  • Stephen McKnight & Laura Povoledo, 2022. "Endogenous fluctuations and international business cycles," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 55(1), pages 312-348, February.
  • Handle: RePEc:wly:canjec:v:55:y:2022:i:1:p:312-348
    DOI: 10.1111/caje.12580
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    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
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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