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Business Cycles with Staggered Prices and International Trade in Intermediate Inputs

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  • Kevin X. D. Huang
  • Zheng Liu

Abstract

This paper proposes a unified theory to explain two observed patterns of international business cycle comovements: 1) The correlations in aggregate output and in consumption between OECD countries tend to be much higher than those between emerging market economies such as Latin America; and 2) Within each region, the output correlations are systematically greater than the consumption correlations. The model departs from the standard international business cycle model in that it incorporates a vertical production and trading chain, which is a feature of growing importance in modern world economy. The vertical chain embodies a powerful propagation mechanism that helps generate the observed magnitude and patterns of international correlations following monetary policy shocks.

Suggested Citation

  • Kevin X. D. Huang & Zheng Liu, 2003. "Business Cycles with Staggered Prices and International Trade in Intermediate Inputs," Emory Economics 0308, Department of Economics, Emory University (Atlanta).
  • Handle: RePEc:emo:wp2003:0308
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    Cited by:

    1. Julian di Giovanni & Andrei A. Levchenko, 2010. "Putting the Parts Together: Trade, Vertical Linkages, and Business Cycle Comovement," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 95-124, April.
    2. Eyquem, Aurélien & Kamber, Güneş, 2014. "A Note On The Business Cycle Implications Of Trade In Intermediate Goods," Macroeconomic Dynamics, Cambridge University Press, vol. 18(05), pages 1172-1186, July.
    3. Rudolfs Bems & Robert C. Johnson, 2017. "Demand for Value Added and Value-Added Exchange Rates," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(4), pages 45-90, October.
    4. Jean-Olivier Hairault & Thepthida Sopraseuth, 2008. "Fluctuations internationales et dynamique du taux de change," Economie & Prévision, La Documentation Française, vol. 0(2), pages 65-91.
    5. Engler, Philipp, 2011. "Monetary policy and unemployment in open economies," Discussion Papers 2011/24, Free University Berlin, School of Business & Economics.
    6. Dmitriev, Alexandre & Roberts, Ivan, 2012. "International business cycles with complete markets," Journal of Economic Dynamics and Control, Elsevier, vol. 36(6), pages 862-875.
    7. Costas Arkolakis & Ananth Ramanarayanan, 2009. "Vertical Specialization and International Business Cycle Synchronization," Scandinavian Journal of Economics, Wiley Blackwell, vol. 111(4), pages 655-680, December.
    8. Drago Bergholt & Tommy Sveen, 2014. "Sectoral Interdependence and Business Cycle Synchronization in Small Open Economies," Working Papers No 2/2014, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    9. Cooke, Dudley, 2014. "Monetary shocks, exchange rates, and the extensive margin of exports," Journal of International Money and Finance, Elsevier, vol. 41(C), pages 128-145.
    10. Nikhil Patel, 2016. "International Trade Finance and the Cost Channel of Monetary Policy in Open Economies," BIS Working Papers 539, Bank for International Settlements.
    11. Pierre-Richard Agénor & Pengfei Jia, 2017. "Macroprudential Policy Coordination in a Currency Union'," Centre for Growth and Business Cycle Research Discussion Paper Series 235, Economics, The Univeristy of Manchester.
    12. Gong, Liutang & Wang, Chan & Zou, Heng-fu, 2016. "Optimal monetary policy with international trade in intermediate inputs," Journal of International Money and Finance, Elsevier, vol. 65(C), pages 140-165.
    13. Shi, Kang & Xu, Juanyi, 2010. "Intermediate goods trade and exchange rate pass-through," Journal of Macroeconomics, Elsevier, vol. 32(2), pages 571-583, June.
    14. repec:bla:worlde:v:40:y:2017:i:10:p:2097-2124 is not listed on IDEAS
    15. Kevin X.D. Huang & Zheng Liu & Louis Phaneuf, 2004. "Why Does the Cyclical Behavior of Real Wages Change Over Time?," American Economic Review, American Economic Association, vol. 94(4), pages 836-856, September.
    16. Virgiliu Midrigan & Joe Kaboski & George Alessandria, 2012. "Trade, Inventories, and International Business Cycles," 2012 Meeting Papers 762, Society for Economic Dynamics.
    17. Craighead, William, 2017. "Intermediate Goods and Exchange Rate Disconnect," MPRA Paper 83075, University Library of Munich, Germany.

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