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Business Cycles with Staggered Prices and International Trade in Intermediate Inputs

  • Kevin X. D. Huang
  • Zheng Liu

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.

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File URL: http://economics.emory.edu/home/assets/workingpapers/liu_03_08_paper.pdf
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Paper provided by Department of Economics, Emory University (Atlanta) in its series Emory Economics with number 0308.

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Date of creation: May 2003
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Handle: RePEc:emo:wp2003:0308
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