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A Unified Model of International Business Cycles and Trade

Author

Listed:
  • Saroj Bhattarai
  • Konstantin Kucheryavyy

Abstract

We present a unified dynamic framework to study the interconnections between international trade and business cycle models. We prove an aggregate equivalence between a competitive, representative firm model that has aggregate production externalities and dynamic trade models that feature monopolistic competition, endogenous entry, and heterogeneous firms. The production externalities in the representative firm model have to be introduced in the intermediate and final good sectors so that the model is isomorphic to dynamic trade models that embody love-of-variety and selection effects. In a quantitative exercise with multiple shocks, we show that to improve the fit of the dynamic trade models with the data, the most important ingredient is negative capital externality in the intermediate good sector. This presents a puzzle for the literature as standard dynamic trade models provide micro-foundations for positive capital externality.

Suggested Citation

  • Saroj Bhattarai & Konstantin Kucheryavyy, 2020. "A Unified Model of International Business Cycles and Trade," CESifo Working Paper Series 8130, CESifo.
    • Handle: RePEc:ces:ceswps:_8130
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • 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
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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